It is a natural part of the business cycle for revenue and earnings-per-share growth to slow as companies mature over time. At this point in the business lifecycle, management teams can and often do choose to reward shareholders in other ways, with one of the most effective being the payment of dividends.
Not all dividends are the same, however, and there a few companies that manage to be great in this regard. To be considered one of these dividend greats, only two things are needed: above-average dividend growth and consistency.
The greats
Two examples of dividend greats are VF Corp. (VFC 1.39%) and W.W. Grainger (GWW -1.98%). At first glance, many investors may simply look at the yields of both companies and wonder what's so special about them. The answer lies in the growth rates of the dividends over time and the frequency of dividend raises. The following is a breakdown of each company's dividend history over the last decade:
|
Company |
VF Corp |
W.W. Grainger |
|---|---|---|
|
Annual Dividend Yield (10-Yr.) |
3.48% |
1.93% |
|
Annual Dividend-Growth (10-Yr. |
13.6% |
15.8% |
|
# Years of Dividend-Growth (10-Yr.) |
10 |
10 |
|
Annual Dividend Yield (5-Yr.) |
3.59% |
2.03% |
|
Annual Dividend-Growth (5-Yr.) |
6.4% |
18% |
|
# Years of Dividend-Growth (5-Yr.) |
5 |
5 |
|
Annual Dividend Yield (3-Yr.) |
3.06% |
1.93% |
|
Annual Dividend-Growth (3-Yr.) |
8.7% |
19.8% |
|
# Years of Dividend-Growth (3-Yr.) |
3 |
3 |
Numbers courtesy of Dividend-Stocks.com.
What the data in the table indicates best is just how consistent both VF Corp and Grainger have been in raising dividends over time. Both companies have raised their respective dividends every single year during the last decade. Not only does this mean that investors can depend on receiving increases in dividends each year, but it also means that the risk of the dreaded dividend decrease is almost a non-factor.
The data also indicates that the yields of the both companies' dividends have decreased only slightly in the last ten years. This shows that management at both VF Corp and Grainger have done admirable jobs of maintaining healthy yields in the face of rapid stock appreciation.
The last major takeaway is that the two companies are still growing revenue and EPS at solid rates. VF Corp is projected to grow revenue 8.4% and EPS 12.6% in 2014, while Grainger is projected to grow revenue 8.3% and EPS 13.1%.
The balance of solid growth and above-average and consistent dividend growth means that both VF Corp and Grainger are about as close to perfect dividend stocks as an investor is ever likely to find.
The future greats
Now that we've seen some actual dividend greats, it is time to consider which companies have the potential to be great with regard to dividend growth in the future. To simplify the search, it is helpful to limit our parameters to companies that have only just started paying dividends but whose management teams have shown a willingness to increase the company's dividend over time.
Three companies immediately come to mind: MasterCard (MA 0.23%), Starbucks (SBUX 1.12%), and Visa (V -0.09%). Let's examine their respective dividend growth over the last three years:
|
Company |
MasterCard |
Starbucks |
Visa |
|---|---|---|---|
|
Annual Dividend Yield (3-Yr.) |
0.26% |
1.41% |
0.85% |
|
Annual Dividend-Growth (3-Yr.) |
25% |
26% |
31.6% |
|
# Years of Dividend-Growth (3-Yr.) |
1 |
3 |
3 |
|
Annual Dividend Yield (1-Yr.) |
0.28% |
1.1% |
0.98% |
|
Annual Dividend-Growth (1-Yr.) |
75% |
23.8% |
47.8% |
|
# Years of Dividend-Growth (1-Yr.) |
1 |
1 |
1 |
Numbers courtesy of Dividend-Stocks.com, Yahoo! Finance.
Most of the data indicates that the management teams at all three companies are starting to increase dividends aggressively and consistently. Both Starbucks and Visa have offered investors a dividend increase every year for the past three years.
While Starbucks is currently far ahead in the yield department, both MasterCard and Visa have been very aggressive at growing dividends in the past year. MasterCard has increased its dividend an impressive 75% in the past year, and Visa is not too far behind with a 47.8% increase in the same time period.
Investors in MasterCard, Starbucks, and Visa still have robust revenue and earnings-per-share growth to look forward to. All three companies are projected to grow sales above 10% and EPS above 17% in fiscal 2014.
Soon-to-be greats
While still projected to grow revenue and EPS at impressive rates for the foreseeable future, MasterCard, Starbucks, and Visa also appear to have what it takes to offer investors solid dividend growth as well.
Not only have these three companies shown an early willingness to grow dividends at robust rates, they are also extremely profitable with sound financial metrics. This should make increasing dividends in the future less of a burden.
In order to help alleviate some investor concern that may come from slowing growth, management teams at MasterCard, Visa, and Starbucks may need to ramp up dividend growth in the not-too-distant future. Accordingly, these three companies should be watched for entry into the prestigious dividend great category.
