3 Sneaky-Good Dividend Stocks to Add to Your Watchlist Right Now

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%?

Fair points
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:

Company

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.

McDonald'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
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
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).

In sum
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:

Fool.com managing editor Brian Richards doesn't own shares of any companies mentioned. Intel and Sysco are Motley Fool Inside Value choices. Sysco is a Motley Fool Income Investorrecommendation. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2011, at 4:00 AM, paultaut wrote:

    York Water, YORW, yield around 3% has been paying dividends for 194 years, increased it the last 14 in a row.

    thats safety

  • Report this Comment On February 10, 2011, at 3:05 PM, inomatos wrote:

    Actually, I think you aren't looking at the 10-10 rule in the way it was intended. It assumes that since a company has been increasing its dividends over the last 10 years, that it probably will in the future. The way to determine the dividend rate of a stock that you purchased ten years ago is to divide the current annual dividend amount by the price you paid for the stock ten years ago. Not by the current price. So if you bough cracker barrel stock at $17.00 in 2001, and your are getting 80 cents per year dividends, then you would be making 4.7% dividends. Unfortunately, I don't know where to get price and dividend information on the S&P 500.

  • Report this Comment On February 13, 2011, at 2:56 PM, gibor365 wrote:

    For high-stock like Intel, correct entry point (I mean when to buy) is extremely important. In 2000's INTC was more than $75 per share , now around $20... So, if you invested into 2000 , yield won't help you too much , if in 2005 - it's a great investment

  • Report this Comment On February 15, 2011, at 2:14 PM, mikecart1 wrote:

    Dividend increase is a misleading stat. Going from 1-2% in 0.1% increments is dividend increasing but is nothing compared to a steady 5-7% dividend that never increases at all.

    I say NO to dividend increasing when it comes to picking stocks.

    :D

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