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Look Beyond the Headlines

By Selena Maranjian – Updated Apr 5, 2017 at 8:07PM

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Is Stanley Works' dividend hike really good news?

For dividend investors, the recent news that Stanley Works (NYSE:SWK) hiked its dividend for the 41st straight year sounds downright enticing. But the headlines alone don't tell the whole story.

The venerable Stanley Works has been paying dividends annually since 1877. That's quite a track record, and it suggests that we can probably count on next year's dividend arriving. Yet not all dividend increases are alike. Stanley's latest is a 3.2% increase, from $0.31 per share to $0.32. 

Other companies have recently announced much more tantalizing hikes. Schwab (NASDAQ:SCHW), for example, has upped its payout by 20%, while Anheuser-Busch (NYSE:BUD) has announced a 12% increase. Canon (NYSE:CAJ) raised its payout 20% in March, while optionsXpress Holdings (NASDAQ:OXPS) upped its dividend by a full 28% recently.

Another consideration is the company's long-term dividend growth rate. A 28% hike seems great, but not if the company rarely increases its dividend after that, or only does so in 1% increments. UPS (NYSE:UPS), for example, has a 17% five-year dividend growth rate, while higher-yielding Merck (NYSE:MRK) has only seen 1% dividend growth over the past five years. Stanley Works has increased its dividend by an annual average of 4% since 2003 -- hiking it by about a penny per year.

More considerations
Then there's the payout ratio. According to David Templeton at seekingalpha.com, Stanley Works payout ratio is around 31%, down from 46%. This means that the company is keeping more of its income for other purposes, rather than paying it out to shareholders. Discriminating shareholders and potential investors might want to check where that money's going. A broader economic perspective might also help; the company is rather cyclical, and it isn’t likely to soar as long as our housing market and economy are in a slump.

What to do
When you approach dividends, do so with a level head. Look for sustainable payout ratios, sustainable competitive advantages, and consistent growth.

If you'd like some recommendations of promising dividend payers, take a free test drive of our Motley Fool Income Investor newsletter, featuring many market-beating picks with yields above 6%.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. United Parcel Service is a Motley Fool Income Investor recommendations. Charles Schwab and optionsXpress Holdings are Motley Fool Stock Advisor recommendations. Try our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

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Stocks Mentioned

Stanley Black & Decker, Inc. Stock Quote
Stanley Black & Decker, Inc.
SWK
$78.98 (-2.22%) $-1.79
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$86.78 (-0.83%) $0.73
Anheuser-Busch InBev SA/NV Stock Quote
Anheuser-Busch InBev SA/NV
BUD
$46.64 (-3.97%) $-1.93
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
UPS
$164.33 (-2.10%) $-3.53
The Charles Schwab Corporation Stock Quote
The Charles Schwab Corporation
SCHW
$70.89 (-1.62%) $-1.17
Canon Inc. Stock Quote
Canon Inc.
CAJ
$22.42 (-1.36%) $0.31
optionsXpress Holdings, Inc. Stock Quote
optionsXpress Holdings, Inc.
OXPS.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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