In this podcast, Motley Fool producer Ricky Mulvey caught up with Motley Fool analysts Matt Argersinger and Anthony Schiavone to discuss:

  • Surprising companies that have beaten the market over a 10-year period.
  • The Dividend Knights stock screen.
  • Listener questions about dividend stocks.
  • One interesting income opportunity.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on October 15, 2022.

Matt Argersinger: I'm really excited. I see a ton of opportunities and I look at this short-term volatility we're seeing and this myopic behavior of moving away from these really high-quality companies into Treasury bonds, so to speak, or looking for yields elsewhere, or just into cash, really. I think that's going to be a big mistake in the long run.

Chris Hill: I'm Chris Hill and that's Motley Fool senior analyst, Matt Argersinger. If you're an investor who's in it for the long haul, now could be a great time to look for opportunities. Ricky Mulvey caught up with Matt and Anthony Schiavone for a conversation about a brand-new category of investing royalty, the Dividend Knights. They dig into a few surprising stocks that have crushed the market and a lot more.

Ricky Mulvey: We spoke about a quarter ago. Stock market hasn't done so hot since then, but how have the dividend payers been holding up in comparison to the broad S&P 500 in this tough year?

Anthony Schiavone: Well, yeah, it has been a tough few months and the dividend payers have not held up as well as I would've thought. In this market, in this bear market, I guess, it's essentially everything has really been hit hard. That's especially been the case for real estate investment trusts. We've talked to REITs before and generally in a downturn like this, where there's a lot of volatility, dividend payers, REITs will hold up a lot better, but I don't think that's the case this time if you look at just how they performed and probably it has a lot to do with the fact that unlike previous downturns, this downturn is really driven by higher interest rates.

Matt Argersinger: Yeah, the Fed raised interest rates. How does that affect the dividend payers? Because the immediate part of my brain would think that investors would want a dividend-paying stock, cost of capital goes up higher, which makes paying money out to shareholders directly a more attractive opportunity.

Anthony Schiavone: I would believe that as well. I think what's happening though is the rates have come up so much so fast that if you're an investor you're looking at a dividend-paying company or REIT that was yielding 3%, 4%, and all of a sudden, I can get that in a risk-free Treasury yield or Treasury bond, I should say. That subtly feels a lot better and I'm worried there's a recession, I'm worried about more volatility in the market, I'm worried about any kind of geopolitical thing that might blow things up. All of a sudden I'm getting pretty decent yield in Treasuries, why take the added risk of going into equities? I think that's part of the story, but I do think it's really a short-term story.

I think, and I'm sure Anthony would agree that, the valuations we're seeing in the market today with a lot of dividend companies and REITs are just the best we've seen in many years. I'm really excited. I see a ton of opportunities and I look at this short-term volatility we're seeing and this myopic behavior of moving away from these really high-quality companies into Treasury bonds, so to speak, or looking for yields elsewhere or just into cash really, I think that's going to be a big mistake in the long run.

Ricky Mulvey: More broadly, is now the time? As dividend investors, are you looking for the companies that are already paying a high yield? Maybe their stock got hit and you think they can continue to pay that high yield? Or is now when you're looking at companies with more room for dividend growth?

Matt Argersinger: You always get this yield versus growth. The question of yield versus growth, do I go for the high-yielding dividend company? Or do I go for the dividend company that's growing? Maybe it doesn't have as high a yield, but it's able to grow their dividend at a faster rate over time. It all really comes down to time horizon. Anthony and I have done some research that really shows that dividend growth companies tend to be the ones that outperform over long periods of time. You can see that if you run through a quick hypothetical example. Let's say you had one stock that was yielding 4%, and you think, "Okay, the share price is going to grow 6%. It's yielding 4%. I'm getting roughly a 10% total return. Or I have stock B here, which is same share price, let's say. Its dividend yield is only 2%, but it can grow its share price at 7%.

How does that work out over time? By the way, the stock B can grow its dividend at 12%. Stock A, the high-yield is only going to grow at dividend 4%. Those are really two realistic scenarios you can find in the market. What's interesting, after five years, the high-yielding dividend payer is outperforming also paying you more dividends. At the 10-year mark, those two scenarios are equivalent, stock A and stock B. They both returned about the same, they're both yielding about the same. Even though stock B of course started with that really low dividend yield at the 15-year mark, stock B, the low dividend yield is clearly outperforming, paying you more dividends. Then at the 20-year mark is when things really work out. Not only is stock B vastly outperforming stock A, its dividend yield or its dividend payout per year is almost three times that of stock A. Again, to mention your time horizon, but the longer you can invest, dividend growth is where you want to be.

Ricky Mulvey: Long time, look for the dividend growers. That makes sense. This is one of those times where I wish that we could just broadcast that chart onto your phone, or maybe not car screen if you're driving right now, but this is one of the limits of audio podcasting definitely come to bear. Let's talk about labels because the dividend companies share their labels. You got your achievers, you've got your aristocrats, you got your champions, you got your kings. We can walk through what those mean. The achievers, that's 10 years of raises, the aristocrats 25-plus years of dividend raises and in the S&P 500. Then your kings have raised dividends for 50-plus years, which is a long time. You guys have a brand new jam, Anthony and Matt. But before we dive into your new flavor that have beaten the market, is there a particular screen that you guys like to use?

Matt Argersinger: Yeah, I'd love to get Ant's thoughts as well on that. But well, I tend to think, I love the list, by the way, I love the aristocrats, I love the kings. I'm so interested in these remarkable companies that just can pay a dividend and increase their dividend for so many consecutive years, it's remarkable. But I think what's missing from a lot of those lists is that, I love getting dividends. I love seeing companies grow their dividends. But what I want to see are these companies beating the S&P 500? Are they beating the overall market? Are they generating a total return that's outperforming the market? Because, of course, as an investor, I always have a choice of investing in a very cheap index fund. That is one particular thing that I screen for, company is paying dividend, great. They're growing that dividend, great. They have low payout ratio, great. But have they beaten the market? Is the management team running that company allocating capital well and outperforming the broader market? I think that's really important.

Anthony Schiavone: As far as my screening process goes, I tend to keep my screens fairly simple. I look for companies with a strong history of earnings-per-share growth, dividend-per-share growth. Sometimes I'll also screen for dividend payout ratio. That's typically less than 60% because I think that leaves more room for dividend growth in the future. Then from there, I like to take more of a qualitative approach and look for companies that have some recurring revenue model. Because my thought is that consistent revenue generation will lead to consistent dividend growth. Then finally, I look to see how the businesses have performed during prior economic downturns, just to get a sense of how resilient and cyclical the company is. That's the quick screen that I do.

Ricky Mulvey: Matt to your earlier point that the previous screens, none of them look for market beaters. It's not just have you paid a dividend, but can you increase it by one penny? That's the only thing that it looks for and that doesn't necessarily matter to investors if you're not beating the market in a meaningful way.

Matt Argersinger: Absolutely right. I think a lot of the aristocrats, although there are wonderful companies, a lot of them love to just hold onto that status and so you'll find and this always drives Anthony and me crazy is you'll find a company that exactly raises their dividend by a penny. Because, of course, that counts as an increase, so it keeps their dividend increase streak alive and keeps them in those aristocrat or king rankings.

Ricky Mulvey: Let's talk about the new screen. You guys ready to get into the Dividend Knights?

Matt Argersinger: Let's do it.

Ricky Mulvey: This is a screen that you set up, so I'm not taking any thunder on this. How do you screen to find the Dividend Knights?

Matt Argersinger: It really goes back to what I was talking about earlier about beating the market. We have these dividend achievers out there in these dividend aristocrats. But I wanted to find companies that paid a dividend for 10 consecutive years, that have grown the dividend, but not just grown it by 1%, 2%, or 5%. I want companies that have grown their dividend by more than 10% annually over the last 10 years and it's kind of like the rule of 10. All these things are 10-year increments. I want them to have beaten the market, beaten the S&P 500 total return over the last 10 years.

You paid the dividend for 10 consecutive years. You've grown that dividend by more than 10% annually over 10 years, and you've beaten the S&P 500's total return for last 10 years. I threw in a few other factors just to control for quality. I wanted each company to have at least $1 billion in annual revenue, had to be traded on a major U.S. exchange. We're not dealing with a lot of international companies or pink sheet companies and the P/E ratio had to be less than 30 for companies on this list. Just to control for quality.

Ricky Mulvey: You run the screen and then most of what you get when you're looking at the list is just, honest, a bunch of boring companies. You got Nike, Microsoft, Kroger, Allstate.

Anthony Schiavone: There you go.

Ricky Mulvey: Are you still listening?

Matt Argersinger: Hopefully, we didn't lose any listeners. But it does. It returns about 133 companies. A lot of companies, they're very much like the ones you mentioned. UPS is another one that's on the list. Just really companies we all know that are fairly boring. That we see almost every day in life. You've got companies like Microsoft that you mentioned. Starbucks is on there, Target, Vail Resorts, JPMorgan. These might be boring and steady companies, but they've delivered an average annual return of 17.6% over the last 10 years. That crushes the overall market. The S&P 500 over last 10 years is up less than 12% annually. These might be fairly obvious companies, but they've done extraordinarily well for investors.

Ricky Mulvey: Each of you picked one obvious Dividend Knight to spotlight. Actually, let's shake it up a little bit, Anthony, you want to go first?

Anthony Schiavone: Yeah. The one that was obvious to me was Union Pacific. This is a company that has paid a dividend for, listen to this, 123 consecutive years. Since the 1800, this company has paid annual dividend every single year. Just think about all the challenges that the railroad industry has faced over those years, including strict regulatory hurdles and disruptive forces like the creation of the interstate highway system, also with the rise of airfreight, as well. But over that time, Union Pacific has still been able to raise that dividend.

I think one of the main reasons why it's a Dividend Knight is that they essentially own a duopoly with BNSF Railroad for the western half in United States and that the barriers to entry in this industry are just massive. I think that creates a strong economic moat where they can really focus on improving efficiency, reducing costs, and that ultimately improves profitability. The management team has done a great job returning that capital to shareholders through dividend increases as well as share repurchases. This one wasn't very surprising to me at all.

Ricky Mulvey: You're really throwing it back when Dwight Eisenhower's interstate highway plan is your disruptor. 

Matt Argersinger: I just want to say Union Pacific, it's amazing. Over the last 10 years, they've returned over 15% to shareholders. They've grown their dividend by almost 16% annually. A company that's over 120 years old, to be able to put up that kind of growth is so impressive. My obvious one, and it's what we've talked about before on the show, The Home Depot. I think a lot of us say, The Home Depot has been a very successful company, it's grown, it's delivered a heck of a return to investors, almost 20% annually over the last 10 years. But I don't think a lot of investors know or appreciate that it's grown its dividend and it's paid a dividend for decades, but just in the last 10 years, it's grown its dividend by almost 21% annually.

If you look at all these companies in aggregate, on average, they've delivered a total return of 17.6% for the last 10 years. On average, they've grown their dividend by 17.4%. So the total return is really highly correlated to the rate at which these companies have grown their dividend. You see that up and down. Again, we talked earlier about dividend growth. That really is one of the key factors. If you're looking to beat the market over time, how fast can this company grow its dividend? If you have a good idea of that, if it's, say, double-digits, it's highly likely that stock is going to return double-digits as well.

Ricky Mulvey: Not every single company on the Dividend Knights list is as obvious as let's say Microsoft or Union Pacific. There were a couple of extraordinarily surprising companies to me on that, one of which was Primerica, lets get 50 of your closest friends and family together to sell some life insurance. Market beater and it pays a dividend. Then when you get home or if you're able to right now, imagine what you think the stock chart for Dillard's would look like and then pull up DDS. Because that has been an absolute market crusher, that also pays a dividend. Then Activision Blizzard, which tech video game company, I wouldn't have assumed that it paid a dividend. Any of those surprises that you want to talk about are particularly highlight?

Matt Argersinger: I think Dillard's is definitely a surprise to me. I would never have imagined a department store. I think a mall-based department store would show up on a Dividend Knights list for the screen that we just did over the last 10 years. But yeah, its total return is over 15%. It's grown its dividend annually by almost 16%. I can't explain it other than the fact that maybe its geographic thing. A lot of other department stores are located in the South and Midwest, hasn't been maybe as affected as the online shopping and e-commerce tailwinds that we've seen over the last 10 years. Maybe they just done a great job of managing the store and the experience there. I'm fascinated by it.

Ricky Mulvey: Sometimes on Motley Fool Money, it's OK to say, "I don't know." I could make up some reasons. When I looked at their income statements, looks like they've done a better job at keeping like SG&A costs down compared to some of their peers like Macy's. They own a lot of their stores, which was good going into the pandemic. They're fending off. It looks like they fended off some short squeezes that can help with stock price, too, but it's one that absolutely befuddles me. I listed some surprising ones there. Anyone that you want to particularly put the spotlight on for the Dividend Knights?

Anthony Schiavone: Yes. One that jumped off the page to me was Vail Resorts. They're the largest owner of ski resorts in North America. I was surprised to see this one on the list because they actually suspended their dividend during the pandemic, since resorts were forced to close. However, they still made a dividend payment in 2020 prior to COVID, and they've raised it since then. That's why they still made the Dividend Knights list. I'm glad they did because they've been such a great dividend payer prior to the pandemic. I believe they've grown their dividend at an annualized rate of 26%, which is very impressive. The fact that they had to suspend their dividend wasn't necessarily management's fault. There's there's nothing they can do about that. I like the fact that they're included on here. If you look at any type of dividend growth list, they're probably not going to show up because they suspended that dividend. But I think they definitely deserve to be on dividend growth list.

Matt Argersinger: That is the beauty of Dividend Knights of our approach versus the Dividend Achievers or Dividend Aristocrats is because there are some great companies that just for whatever reason, because they're being conservative or they're worried about capital allocation, they might temporarily suspend their dividend or cut their dividend. If you do that, automatically, you're right off all those other lists. But you can still be on Dividend Knights because the growth of your dividend, even if you cut it a bit, might still be over 10%. Even if it's flat or you cut it, and so it's still makes our list, which I think is the powerful thing. I don't care if accompany cut its dividend, but it's still grown its dividend by 10% annually over the last 10 years. I'm still very interested.

Ricky Mulvey: Let's talk a little bit about rates. Because when you're screening for price earnings, that unfortunately leaves a lot of reeds out of the equation. First of all, Matt, how dare you? Second of all, what do you get when you run a funds from operation, which is the preferred metric for reeds versus that price to earnings screen.

Matt Argersinger: This was surprising. Seventy-two companies made the initial screen, but only six REITs, believe it or not, six REITs have both beaten the market and raised the dividend by an annual rate of 10% over the last 10 years. It's a really exclusive list. The list is American Tower, CubeSmart, Equity Lifestyle Properties, Extra Space Storage, Life Storage, and Prologis. It's like industrial self-storage dominated REITs right here. That make our Dividend Knights list. But I was surprised it was so few.

Ricky Mulvey: Podcasts at is the email for the show. We appreciate your questions. Been getting some questions about dividends in particular, so I thought I'd run it by you. This one comes from Jason in Great Britain. He asks, I was wondering if you could talk about Yara International. I was put onto this by a friend in the agricultural sector, it's got a great dividend yield of 8.25% and with fertilizer in high demand and the stock beaten down is now a good time to open a position.

Matt Argersinger: Yeah, thanks, Jason, I took a quick look at this one. It's an interesting company. It's got a good history. I think it's based in Norway. What I worry about is, it's had a really big surge recently in both its profits and its margins. I suspect that's obviously because of higher fertilizer prices, higher commodity prices, greater agricultural demand, especially in places like Europe right now where there's a lot of supply constraints. Typically accompany like Yara will tie its earnings to dividends. What's happening recently as earnings have surged and so has its dividend and therefore you could this really great dividend yield. But I could see that dividend coming down as commodity prices reverse, their earnings come down. It might be a great company, I would just not rely on that dividend yield you're seeing to make a judgment on whether or not to invest in the company because it's likely that the earnings are a bit inflated right now.

Ricky Mulvey: Next question comes from Lau Chu. I've always lean toward value overgrowth and pick stocks with a low debt-to-equity ratio. For this reason, I've stayed away from Home Depot with a ratio of 319. Do you think Home Depot's debt load could impact its ability to pay a dividend in the future? Is it's still a quality company?

Matt Argersinger: It's a great question, Lau Chu. Home Depot's debt-to-equity ratio is a bit misleading right now. The company has been aggressively buying back it's shares, which reduces shareholders equity and tends to inflate that debt-to-equity ratio. If you want to look at a better balance sheet measure, I would look to debt to EBITDA or essentially you're looking at debt to the company's pre-tax operating earnings. If you do that, you get a multiple of 1.7 right now. That's only slightly higher than the multiple HD had five years ago. From an operating basis, I wouldn't get worried at all about their balance sheet, and yes, as you know, we've talked about Home Depot, we talked about early in the show. I think it's a really well-managed company. It's got a low dividend payout ratio, which can help it absorb any shocks in earnings if we do hit into recession.

Ricky Mulvey: Last question comes from Sandra in Georgia. Are there any non-dividend paying companies that are mature enough that you think they should start paying one soon?

Anthony Schiavone: Yeah, so I'm going to cheat a little bit here, but I'm going to go with Walt Disney. The company suspended its dividend at the beginning of the pandemic, mostly due to the uncertainty in the economy and the fact that their theme parks are closed. Since then, businesses picked up pretty steadily, but management's been more focused on reinvesting earnings back into the business to help grow Disney Plus and some of their other growth initiatives. If I'm not mistaken, I think Disney is one of only three companies in the Dow Jones Industrial Average who doesn't pay a dividend. Management has said that dividends remain a part of their capital allocation strategy. Once we see some more normalization in the economy and that uncertainty fizzles out, we might see a dividend reinstatement from Disney.

Ricky Mulvey: Sounds like the theme parks are all the way back. We'll see if they get one for the dividend. Matt, what you got?

Matt Argersinger: Disney is a great one. I would go with Alphabet, Google. Than one always comes to mind to me is one that I think will start paying a dividend pretty soon. I think it's going to follow in the steps of Apple, Microsoft, and some of the other big tech companies. The business is just so reliably great now from enough, from a cash flow perspective, and I wonder at some point they're going to say, you know what, we invest a lot of capital into these far-flung ventures. Lot of them don't work out, some have, but we're producing a lot of excess cash flow. Let's start returning some of that to shareholders. I want to say within the next three years, Alphabet starts paying a dividend.

Ricky Mulvey: We'll check up on it. Let's wrap it up. On The Dividend Show on Motley Fool Live, you guys always like to highlight an interesting income opportunity. What do you have for the listeners of Motley Fool Money?

Anthony Schiavone: Well, there have been so many interesting discoveries with this new Dividend Knights list that we're putting together, for example, there's a company called Pool Corporation, P-O-O-L, and that's the ticker as well. As you might guess, they specialize in pool equipment, pool maintenance, landscape products around your pool. It's been a monster performer. It's up 24% annually. Since 2012, it's raised its dividend annually by more than 20%. I'm just fascinated by the business, it seems so simple. Sometimes it goes to show, we spent a lot of time as investors looking for complex companies or companies that are growing at x rates and disrupting other industries. Here's this simple company that just specializes in pool equipment and it's been a monster. If you put $10,000 in the pool ten years ago, you'd have almost $100,000 right now. That's beautiful to me. 

Ricky Mulvey: We've got pool companies. We got Dillard's, we got Primerica, we got Kroger, we got Home Depot. That has been The Dividend Show. Anthony Schiavone, Matt Argersinger, thank you so much for your time.

Anthony Schiavone: Thanks, Ricky.

Matt Argersinger: Thank you.

Chris Hill: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.