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3 Dividend Growth Companies to Teach Your Children About Investing

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The sooner your children start learning about money, saving, and investing, the better their chances of being financially successful throughout their lives. Mattel (NASDAQ: MAT  ) , Nike (NYSE: NKE  ) , and Apple (NASDAQ: AAPL  ) are three great candidates to use to start teaching your children about the basic principles of dividend growth investing.

Mattel is no game
Mattel is a market leader in the global toy industry. The company benefits from popular brands like Barbie, Hot Wheels, Fisher-Price, and American Girl, among others. Kids from different generations have built strong emotional connections with the company and its products, and this is the kind of durable competitive advantage that provides the foundation for sustainable dividend growth over the years.

Even if the industry is quite mature in developed countries, spending on toys and other discretionary items tends to rise with disposable income, and this provides plenty of growth opportunities for Mattel in emerging markets over the long term. According to the company, China and India account for more than one-third of the total population in the world but only 10% of toy industry sales.

The business model is quite efficient when it comes to cash flow generation: The payment cycle is relatively short, the company has operating margins in the area of 16% of sales, and capital expenditures are quite low, in the area of 3% of sales. Importantly, management has committed to consistent capital distributions in the long term, targeting a total cash yield -- dividends plus share buybacks -- in the area of 4% to 6%.

The company has raised dividends over the last 22 consecutive years in a row, it has a sustainable payout ratio in the area of 57% of earnings, and it pays an attractive dividend yield of 3.2%.

Kids of different ages love Mattel and its products; perhaps it would be a smart idea for them to learn how the company translates growing sales into cash flow and dividends for investors.

Nike is playing to win 
Renowned athletes like LeBron James, Roger Federer, and the national soccer team of Brazil have many things in common. Superb talent is one of them; Nike sponsorship is another one. Nike has invested through the decades in sponsoring many of the most popular athletes in the world, and memorable marketing campaigns have made the company's brand the undisputed leader in the global athletic footwear and apparel industry.

A widely recognizable brand, a reputation for quality, and a strong focus on innovation generate superior pricing power for Nike, and the company enjoys economies of scale when it comes to areas like negotiating power with suppliers, marketing, and other expenses.

Nike has raised its dividends in each of the last 12 consecutive years, including a 14% increase announced in November. The dividend yield is quite modest, around 1.2%, but the payout ratio near 27% of earnings leaves plenty of room for further dividend growth.

Sports are not only fun, they're also good for your children's health, and it would be quite easy for your kids to relate to the company that sponsors many of their favorite athletes and provides the clothes and shoes for their own sports activities.

Apple is plugged in for dividend growth 
Children today have an amazingly fluid and comfortable relationship with technology, and Apple has done a lot to foster that relationship with intuitive and easy-to-use products like the iPhone and the iPad.

Lower-priced Android devices have gained market share on a global basis lately, but Apple is still the undisputed leader on the high end of the pricing spectrum. Apple owns one of the most valuable brands in the world and provides customers with a unique user experience. This differentiation allows the company to charge higher prices for its products and generate superior profit margins for shareholders.

In addition to having nearly $147 billion in cash and liquid investments as of the end of the third quarter of 2013, Apple generated nearly $53.7 billion in cash flows from operations over the 12 months ended on Sept. 28. Investments in fixed assets absorbed only $8.2 billion of the company's cash flow, which allowed Apple to allocate almost $10.6 billion to dividends and $22.9 billion to share repurchases in the last year.

The company has a relatively young dividend history. Apple reinstated dividends in 2012 and hiked them by 15% in 2013, but the payout ratio is quite low, in the area of 30% of earnings. The stock pays a 2.2% dividend yield at current levels.

Bottom line
Both knowledge and investment returns compound over time, so the earlier your children start learning about investing, the higher the future rewards. Mattel, Nike, and Apple are particularly good candidates for your kids to learn about the importance of sustainable dividend growth by analyzing businesses they can understand and relate to.

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  • Report this Comment On January 15, 2014, at 9:50 AM, Mathman6577 wrote:

    I think AAPL is poised to become a monster dividend grower going forward. Lots of cash flow and low debt.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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9/4/2015 3:59 PM
AAPL $109.27 Down -1.10 -1.00%
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