Last week, I presented a "crazy-simple" dividend-investing strategy called the 10-10 Formula. I wrote favorably about the two-step test for screening for dividend-growth stocks:
- Seek out stocks that have raised dividends for a minimum of 10 consecutive years, and
- Increased those dividends by an average of 10% or more per year for a decade
Reaction to my piece was largely positive … but a few astute readers complained that despite their fast-growing payouts, the stocks presented actually had low yields (in the 1.5% to 2% range, on par with the S&P 500 average). How can those compare to a stalwart utility such as Verizon (NYSE: VZ ) , which pays 5.4%?
Companies with significant growth in dividend payments likely have a small base on which those payouts are growing. Cracker Barrel Old Country Store, which had the fastest-growing dividend of all stocks on major U.S. exchanges over the past 10 years, still only paid out a 1.7% yield over the past year, less than a third of Verizon's.
To which I say: A dividend portfolio shouldn't be rigid. You'll want high yielders, fast-growing yielders, international dividend stocks, and alternative yielders (e.g., REITs, BDCs, MLPs).
Nonetheless, today I wanted to share the best of both worlds. I'm calling these three stocks "sneaky-good," because they have current yields close to double the yield of the SPDRs (NYSE: SPY ) S&P 500 tracker (about 1.7%), and they're growing those payouts quickly, with each sporting a 10-year compound annual dividend growth rate exceeding 10%. On top of that, each has a history of raising dividends.
In other words, I want stocks that satisfy my 10-10 Test and yield considerably more than the average. So let's reveal our three sneaky-good selections:
Current Dividend Yield
10-Year Dividend-Per-Share CAGR
Raised Dividends for 10 Consecutive Years?
Has Been Paying Uninterrupted Dividends Since …
|McDonald's (NYSE: MCD )||3.3%||26.5%||Yes||1976|
|Sysco (NYSE: SYY )||3.5%||15.5%||Yes||1969|
|Intel (Nasdaq: INTC )||3.3%||24.6%||No (eight years)||1992|
CAGR = compound annual growth rate. Data from Capital IQ, a division of Standard & Poor's.
Mickey D's ranks among the world's most ubiquitous brands. Its size, experience, and brand name give it pricing power in the event of commodity price swings. Its stores span the globe -- in fact, only about 30% of its sales come from the United States -- yet it still has growth opportunities ahead in China.
The company posted increases in same-store sales throughout the recession, and it's sitting on a lot of valuable real estate. Still, the fast-food industry could face governmental regulation, and new McDonald's locations have to compete against the likes of Burger King and Wendy's, as well as the more than 32,000 existing McDonald's restaurants.
Nonetheless, the company leads its industry, and management has made a point of returning value to shareholders in the form of dividends and buybacks.
Sysco is a giant in food distribution and marketing, selling to schools, hotels, hospitals, and restaurants across North America. Not only has it been paying a dividend every year since 1969, but it's also raised its dividend every year since then, too. For the definitive word on this company's excellence, I'll excerpt from Income Investor analyst Andrew Sullivan:
Food distribution is ultra-competitive and capital-intensive -- forces that typically combine to mean lower profits. Yet Sysco earns $1 billion per year and boasts a return on capital of almost 20%. In fact, it has been consistently profitable since its founding in 1969. Sysco's recipe has been simple: Be the best in the business. It has the most sales representatives per client in the industry, boasts a full selection of goods, and earns high marks for on-time and error-free delivery -- three crucial success factors. It also has astutely acquired companies to build its market share from 2% in 1979 to 17% today. That's actually a huge lead: The second-biggest player has a 9% share, and the third has 4%. Astonishingly, the next 47 competitors combined have only a 13% share.
Wow. With a 3.5% yield and a 10-year dividend CAGR of 15.5%, Sysco will never show up as a "high yielder," nor will it appear among the list of fastest growers. But its operational efficiency and dividend consistency should give you notice that this stock is right in the sweet spot for income-seekers.
Intel may seem like an odd choice here -- mostly because by including it, I'm breaking my own "10 consecutive years of dividend increases" rule. It kept its dividend flat from 2000-2003, likely because of this 50%-plus share price implosion during the dot-com drama. Nonetheless, I'm giving Intel the benefit of the doubt.
Speaking of doubt, the company has its skeptics. The Fool's technology expert, Eric Bleeker, sees bumps in the road ahead: "Intel is facing what I believe to be its greatest challenge yet. … [its] long-standing competitive advantage of being the leader in the only architecture for Windows is destroyed." In addition, Intel has mostly missed out on the fast-growing tablet and smartphone markets.
Still, not everyone is as pessimistic on Intel's position in the server and chip markets it's dominated for years. The Motley Fool Pro team believes those markets are stable, with years of steady demand ahead. It's cheap on a price-to-earnings basis, and it's in the middle of a massive buyback program. It has a lot of cash and little debt, leaving plenty of room to continue throwing off cash to shareholders and funding R&D projects to keep its edge (and get in the tablet and smartphone game).
These three stocks will never be confused with the 10%-plus yielders floating around in the REIT world right now, nor will they show up on screens for massive dividend growth. But they occupy a middle ground that should excite dividend investors of all stripes: They pay yields about twice the market average, while raising annual dividend payments at an aggressive clip. That's a combination worth your attention.
Now, I didn't dive deeply into valuation. I encourage you to do your own due diligence on these three stocks by using our free MyWatchlist tool, which allows you to track price movements -- and the key news driving those price movements. Sign up for this brand-new, 100% free Fool service here: