Tortoise or hare?

When someone mentions a dividend-paying stock, which image first comes to mind? I'd imagine that you and 99% of the rest of the investing public would say "tortoise." Dividend payers are slow-growing entities, right?

After all, finance theory says that one of the main reasons a company pays a dividend is because it doesn't have enough profitable investment opportunities within its business, and therefore chooses to distribute a chunk of its profits to owners.

Faster-growing companies have many profitable opportunities to deploy profits, and therefore feel they can best serve shareholders' interests by reinvesting the cash in their business.

But hold that thought...
A dividend indicates that the company is confident enough in its future growth to pay out a fixed portion of its earnings every year. High-growth companies may promise more growth, but their position could be riskier as they head into uncharted waters.

Could dividend payers actually grow faster over time, tortoise-style, while hare-like growth stocks falter along the way?

To answer that question, I decided to look at some empirical evidence. I searched the Capital IQ database for the trailing-10-year earnings growth rates of dividend-paying companies with a $1 billion or greater market cap. I used 10% compounded earnings growth rate as the hurdle, and compared those results with the growth rates of non-dividend-paying companies also capitalized at greater than $1 billion.

Should be an easy victory for the non-dividend payers, right?

Defying conventional wisdom
Not so! The results of the search defy accepted wisdom. Fully 20% of 981 dividend-paying companies were able to increase earnings at a 10% annual rate over the past 10 years, while only 15% of 583 non-dividend payers could do the same.

What's more, last year my colleague James Early cited a study that confirms my findings:

In 2003, Rob Arnott -- former editor of the Financial Analysts Journal, a publication of the CFA Institute -- and Clifford Asness, managing principal at AQR Capital Management, looked at dividend yields and subsequent 10-year earnings growth. Their findings? Amazingly, earnings growth increased with dividend payout, right up to the highest payers having the highest next-10-year earnings growth.

This tells us two things:

  1. It's pretty hard to generate consistent earnings growth over time (in my Capital IQ research, only 15%-20% of companies could), and
  2. Dividend payers are more likely to do so.

Pretty revolutionary, no? The stodgy, supposedly slower-growth companies actually grew faster than their supposedly high-growth rivals. Admittedly, the tech bubble collapse may have played a part in these results, but the underlying message is that dividend payers can grow at not-so-shabby rates over time.

This spurred me to seek out stocks with a decent dividend yield and a recent history of strong growth. I also wanted well-capitalized companies, so I set the long-term debt-to-equity ratio below 75%. The handy CAPS screener returned the following seven companies.


CAPS Rating*

LT Debt-to-Equity Ratio

Market Capitalization (billions)

Revenue Growth (Last 3 Years)

Dividend Yield %

AllianceBernstein (NYSE:AB)






Aracruz Celulose (NYSE:ARA)


















Eni (NYSE:E)






Southern Copper (NYSE:PCU)






Telekom Indonesia (NYSE:TLK)






*Out of five stars.

Wow. These companies' average revenue growth was 23% over the past three years, yet they're yielding an average of 7%. Obviously, their future growth profile might differ from their past performance, but these seven stocks seem to live in that sweet spot: solid growth and a decent dividend. Thus, these fast-growing dividend payers are a good place to start your research.

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Fool analyst Andrew Sullivan loves dividends, but he does not have a financial position in any of the stocks mentioned in this article. AllianceBernstein is a Motley Fool Income Investor recommendation. Telekom Indonesia is an Income Investor and Global Gains selection. The Motley Fool has a disclosure policy.