Get Paid Now and Later

Do we want our money now or later? Income-seeking investors face this question all the time. Should we focus on companies paying large dividends today or companies that promise rapid dividend growth over time?

The truth is we don't have to choose. Both strategies make sense when the valuation is right, so I like to have a mix of both in my portfolio.

And I'm always looking for new ideas, so I've decided to screen the S&P 500 to see which companies are yielding the most right now and which companies have offered the most dividend growth over the past 10 years. I'm also screening those dividend growers for a minimum compound annual growth rate (CAGR) in their dividends of 5% over one, two, three, five, and 10 years. After reviewing these lists, I'm going to pick four companies and then follow up on them over the coming weeks. If I like one enough, I might just buy some shares.

What are the best dividend growers of the past 10 years?
The list below surprised me a bit, and I think one reason some of these companies made the list is they initiated dividends in the past five or six years and grew them rapidly from a very small base. That said, dividend growth is dividend growth. So here are the top five dividend growers from the past 10 years, along with their free cash flow (FCF) and dividends paid over the past 12 months.

In calculating FCF, I used the standard formula of cash flows from operating activities minus capital expenditures. In addition, I have taken out tax benefits from stock options and cash spent on acquisitions. Moving forward I'll dig a bit deeper and normalize acquisition expenses, but for now this gives a good one-year picture.

I'm eliminating Intel from this list because I have concerns about the company's inventory levels (but if it can sustain its FCF, the stock will prove cheap right now). Between Medtronic and Stryker, I'll go with Stryker because it appears to have more room to grow its dividend and a couple of other Fools have recommended it to me. Paychex and Tiffany & Co are in because they come from different industries -- and only one company from the next list makes the cut.

Which companies yield the most now?
The good news for those seeking healthy yields is that 80 of the 500 companies in the S&P 500 currently yield more than 3%. Of course, they're not all worth purchasing at these prices, but that's a nice variety. For my purposes I removed real estate investment trusts (REITs) and utilities because they traditionally have high yields. The list below shows the top five of the remaining companies in the S&P 500.

I calculated FCF using the same method I used for the dividend growers, but I also looked at acquisition histories and FCF over multiple periods. While Ford and Verizon fall down on this metric and may ultimately have problems paying their dividends, I don't think anything is an immediate problem.

From this list I'm not interested in AT&T, Verizon, or Ford because of their structural problems. Citizens Communications it is out because it is already a Motley Fool Income Investor selection, and you can see why from its FCF numbers. That leaves us with UST, which has a juicy 5.3% yield and plenty of FCF to cover it. Smokeless tobacco isn't the prettiest business, but this isn't a beauty contest either. UST is in.

Where to next?
It's Tiffany & Co, Stryker, UST, and Paychex that will get the once-over in the next month. All good companies and all from different industries, but other than UST we're looking at yields of 1.6% and below, so the potential for FCF and dividend growth will be very important as we examine the other three.

If you're interested in learning about dividend-paying companies that have already been vetted and are delivering measurable returns, consider taking a free 30-day trial to our Income Investor newsletter. Each month Fool dividend guru Mathew Emmert recommends two dividend payers, and over the past two and half years his picks are beating the S&P 500 by more than 4 percentage points. With the free trial you'll also gain access to all past recommendations and subscriber-only message boards. Click here to learn more.

Nathan Parmelee has no financial stake in any of the companies mentioned in this article. Intel is a Motley Fool Inside Value recommendation. The Motley Fool has adisclosure policy.