The power of dividends is nothing new to decade-long income investors. Yet, more recently, droves of investors are jumping on the dividend bandwagon, thanks to all-time low savings rates. But not all dividend-paying stocks are created equal.
Looking beyond the Aristocrat status
These two great examples show us that concentrating on one sole metric, like dividend yield, means that we're likely overlooking potential red flags. Instead, a more sustainable strategy is buying dividend stocks that harness both reliable dividend growth and low payout ratios.
Take a look at these three under-the-radar companies. While each of them belongs to the elite S&P 500 Dividend Aristocrats, an exclusive club of blue chips that have boosted their dividends for at least 25 consecutive years, these three are great dividend stocks for other reasons too.
1. VF (NYSE: VFC )
Through economic (and consumer waistline) recessions and expansions, the company behind North Face apparel and 7 For All Mankind jeans has increased its dividend for an impressive 40 years! VF pays a modest 1.9% dividend yield, but don't let that dupe you. The company has increased its dividend by 248% over the past decade, outpacing the Consumer Price Index nearly tenfold.
And VF's dividend payout ratio, which indicates how much of the company's net income is paid to shareholders through dividends, is 31%. That means the company has plenty of room to grow its dividend even more in the future.
In the ultra-premium-priced jeans market, VF has gained some of competitor True Religion's (NASDAQ: TRLG ) female customers on pricing. True Religion's stock has vastly underperformed, and its profitability has shrunk. Meanwhile, VF's has skyrocketed. For the first quarter, VF's earnings were up an impressive 25%.
2. Sigma-Aldrich (NASDAQ: SIAL )
Maker of test tubes and beakers, Sigma-Aldrich has increased its dividend every year since 1976. Even though the company pays a relatively scrawny 1.1% dividend yield, its 21% payout ratio signals the company has ample opportunity to up its dividend for many years to come.
Sigma-Aldrich recently hiked its dividend by 7.5%. And during the past decade, the specialty chemical maker has upped its dividend at a rate that outpaced the CPI more than sixfold. Last quarter, Sigma-Aldrich was value investing giant Donald Yachtman's biggest new holding.
3. Illinois Tool Works (NYSE: ITW )
This maker of industrial products and equipment like fasteners, coatings, and plastic stretch films has increased its dividend for 49 consecutive years. Even though the stock suffered badly in 2008 when the construction and transportation industries it depends on were hit hard, Illinois Tool Works is greatly benefiting from the current economic recovery.
Its stock currently boasts a 2.2% dividend yield, and the company recently grew its dividend by 5%. In fact, the Illinois-based manufacturer increased its dividend by 230% over the past decade, outpacing the CPI by eight-and-a-half times. Its payout ratio is a very healthy 26%.
By ignoring companies that pay lower yields, you're likely missing out on the next best dividend growth stocks. Don't stop your search at high dividend yields alone. Be sure the company has the financial resources to boost its dividend, effectively giving you a pay raise, for years to come.