My parents have both had one. So have my brother and nearly all of my friends -- but not me. I'm talking about a pay raise. Not once has an employer decided to give me more money. Then again, I've never held a salaried position.
I've spent most of my professional life in commission-based positions, and the past several years I've worked as a freelance financial writer -- not exactly a career path destined for untold wealth. Still, just once in my life I'd like to celebrate an increase in take-home pay.
Fortunately, I am lucky enough to cash a stream of dividend checks that grow bigger and bigger each year.
Past performance and future results
Certainly, that investing axiom about past performance not necessarily being indicative of future results rings true in most cases. However, the past can yield valuable clues to help us forecast what lies ahead -- be it for a company, a mutual fund, or a racehorse.
There will always be exceptions, of course. For example, those who bought shares of Anheuser-Busch
Companies that boost their dividend payments year after year possess two key characteristics: the ability to generate consistent cash flows and a management team willing to return a portion of that wealth to shareholders. Nothing is set in stone, but more often than not these companies will continue to increase their quarterly payouts well into the future.
Don't ignore the big picture
Dividends represent only part of the total return picture. After all, the return from a hefty 5% yield can be quickly erased if the underlying stock price drops 10%. And dividend payments can be slashed or discontinued at any time. Therefore, it pays to focus on companies with attractive fundamentals. These companies will likely offer superior capital appreciation potential and sustainable dividend hikes.
With that in mind, I have been on the lookout for companies with above-average yields that have shown the financial stamina to increase their payouts at a rapid 12% (or higher) annual clip over the past five years. More importantly, I wanted to home in on those likely to continue that streak.
Therefore, I limited my search to companies that are expected to deliver healthy double-digit earnings growth over the next five years. To narrow the field even further, I concentrated on those with reasonable capital expenditures and generous -- but not excessive -- payout ratios, specifically below 50% (or below 70% for financial institutions).
Here are a few of the companies that made the cut:
|
Stock |
Current Yield |
5-Year Dividend CAGR* |
Payout Ratio |
Projected 5-Year EPS** Growth |
|---|---|---|---|---|
|
Sysco |
2.3% |
21.4% |
45.0% |
13.7% |
|
Waste Management |
2.4% |
140.2% |
37.6% |
10.6% |
|
Carnival |
2.1% |
13.8% |
33.1% |
13.7% |
|
Federated Investors |
2.2% |
32.9% |
31.6% |
11.0% |
|
Washington
Mutual |
4.5% |
20.1% |
50.8% |
10.0% |
What's all the excitement about?
Occasionally, I get feedback from readers who are concerned that we might have a Starbucks on the moon (not that far-fetched when you think about it) before compound interest and dividend reinvestment will make a noticeable impact on their portfolios.
But consider this: A $50,000 investment made today earning an average yield of 4.7% -- the same as our Motley Fool Income Investor portfolio -- will churn out approximately $2,350 per year in dividend income. Assuming a 10% compound annual growth rate, the same portfolio would generate annual income of $6,095 after 10 years, for an effective yield of 12.2% on that original $50,000 investment -- to say nothing of share price gains along the way.
While the math is simple, uncovering stocks that can make this strategy work is no easy task. Fortunately, Income Investor chief Mathew Emmert has removed much of the guesswork, combing through the high-yield universe for firms with exemplary dividend track records -- not to mention steady cash flows, attractive growth prospects, and proven management teams.
If it has been a while (or never) since your last pay raise, you can at least give a jolt to your investment income by joining us for 30 days at no charge. And if you have been rewarded with a pay increase recently, why not splurge on a one-year membership -- you can afford it. You'll be glad you did.
Fool contributor Nathan Slaughter has never received a Christmas bonus either, but that's for another story. He owns none of the companies mentioned. Sysco is an Income Investor recommendation, Federated Investors and Anheuser-Busch are Inside Value recommendations, and Starbucks is a Stock Advisor recommendation. The Fool has a disclosure policy.
