Dividends That Double and Redouble

We're all looking for stocks that will double for us, and then double again and again -- aren't we? Well, here's another thing you might look for: a dividend that doubles and doubles.

Even better, the doubling dividend might actually be easier to find, since it's contingent on a company's operations and not the whims of the market.

Find dividends that will double regularly
A good place to start looking for dividends that are likely to double is at companies with superior past rates of dividend growth. These companies, some of which may be screaming "Buy Me!" right now, already have a tradition of returning cash to shareholders. And if the underlying companies are in good shape, then that tradition is likely to continue.

Take note of an important caveat, though: The companies need to be in good shape. They need to have cash, they need to be generating cash, and you don't want them to be facing a troubled operating environment.

Financial companies such as Citigroup and Washington Mutual, for example, have seen liquidity dry up in the recent subprime lending crisis and have recently cut their dividends significantly to preserve cash. It may have been difficult to predict this coming crisis as recently as two years ago, and that's why it's important to diversify your dividend payouts across industries, just as it is to diversify your portfolio as a whole.

Desirable traits
You also want to keep track of a company's payout ratio, which shows you how much of a company's earnings are being paid out as dividends. Very high payout ratios, especially those above 1.0, can be unsustainable, since companies can't pay out more than they take in for very long.

Cast an eye at the balance sheet, too, to see whether there are high or quickly growing debt levels and what the cash stash looks like. If a company is piling up debt obligations, that may be a sign that its dividend growth rate will slow down. Remember: A company has to pay its creditors before it pays it shareholders.

Finally, keep track of the company's cash flow statement, to be sure that the company continues to generate cash.

Getting back to superior growth
But let's say you want to find dividends that double every six years. For that, you need a compound average annual growth rate of about 12.25%. Believe it or not, that's not a difficult thing to find.

Here are seven companies with five-year growth rates of 12% or more:

Company

5-Year Dividend Growth Rate

Norfolk Southern (NYSE: NSC  )

31%

Home Depot (NYSE: HD  )

31%

McDonald's (NYSE: MCD  )

52%

American Express (NYSE: AXP  )

16%

Automatic Data Processing (NYSE: ADP  )

17%

Paychex (Nasdaq: PAYX  )

20%

Harley-Davidson (NYSE: HOG  )

52%

What it means
So now that you've found yourself gazing expectantly at some solid dividend payers, just what can you expect from them if they're doubling their dividends rapidly?

Imagine you've invested in the Fingernail-on-Blackboard Car Alarm Co. (Ticker: AIEEEE), which is trading for $33 per share, pays a $1 dividend (for a current yield of about 3%), and has increased its dividends by an annual average of 15% over the past 10 years. If you buy 100 shares for $3,300, you receive $100 in dividends in the first year. In 20 years, the dividend will have increased some 16 times, meaning you'll get $16 per share, or a total of $1,600. That's roughly half of your whole initial investment!

Ten years after that, if the dividend has risen at just 10% for the past decade, it will have become more than $40, paying you more per share each year than you paid for each share originally.

Better still, as experienced dividend investors know, there's usually more to the story -- there's stock appreciation, too. The stock price of a healthy, growing company doesn't remain in place for long. Sure, it might slump with the market for a while, or take a temporary dip if the company experiences a hiccup. But in the long run, it will probably increase, as a reflection of the enterprise's growing revenue, income, and dividend.

Where to find them
You can find these dividend doublers by looking to the dividend histories of the companies you admire. You may discover that some are like shooting dividend ducks in a barrel. Or you can screen online for companies paying sizable dividends and then see which of them have raised their dividends the most significantly in the recent past. Finally, you can also tap services such as our Motley Fool Income Investor newsletter, which recommends two strong dividend payers each month.

Its recommendations are ahead of the broader market by more than 7 percentage points on average, and the picks offer a greater than 5% average yield. A free trial will give you access to all past issues and all recommendations, as well as our list of top stocks for new money now.

So as you move through your investing life, remember our friend the dividend, and respect the power it can bring to your portfolio.

This article was originally published on April 8, 2008. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of McDonald's and Home Depot. American Express and Home Depot are Motley Fool Inside Value recommendations. The Motley Fool is Fools writing for Fools.


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