9 Dividend Growth Stocks offering Growth at a Reasonable Price (GARP)

Future growth is one of the most desirable qualities for any stock holding. The company that can grow its sales, earnings, and dividends at exceptional rates promises to reward its shareholders with above average returns over time, but often those stocks get so much attention that their prices become unreasonably high before an investor can establish a position.

Recognizing this problem led to the concept of Growth At a Reasonable Price, or GARP, which seeks to avoid such overpriced equities.

[ad#Google Adsense 336×280-IA]Below, I have screened the Dividend Champions database with that in mind.

(Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years.

“CCC” refers to the universe of Champions, Contenders, and Challengers.)

Since the CCC database focuses on Dividend Growth, I began by eliminating companies that had 5-year Dividend Growth Rates of less than 8%.

This rate is more than twice the rate of inflation and ensures that each company is passing on a reasonable portion of its profit growth to shareholders. This step trimmed the initial list of 471 companies down to 252. To address the notion of “Reasonable Price,” I then sorted by the Price/Earnings Ratio and eliminated any stock that had a P/E of 20 or above.

(Although a P/E of 15 or less seems reasonable, I did not want to eliminate traditional “Blue chip” stocks that usually garner a premium to the market P/E, especially knowing that subsequent steps would eliminate many candidates.) This step reduces the number of companies to 127.

Next, I sorted the companies by their Estimated Earnings-Per-Share Growth for the Next 5 Years and eliminated any company that is not expected to grow EPS by at least 8%. My reasoning is that earnings growth fuels both dividend growth and price appreciation, giving these companies a reasonable chance to provide consistent returns over the next five years.

This screen reduced the number of candidates to 74 companies. As a secondary step, in order to avoid inconsistency, I eliminated any company that had shown negative growth over the past five years or was expected to experience negative growth in EPS this year or next year. That cut the list to 47 companies.

Finally, since this exercise focuses on Dividend Growth stocks and seeks to highlight a combination of growth and yield, I eliminated companies that had yields below 2.5% as a link between the past and the future. In other words, after years of dividend growth, these companies should be offering a reasonable payout, along with the prospect for continuing that rate of dividend growth. A 2.5% yield, growing at a minimum of 8% annually, will result in a Yield on Cost of 5% or more within nine years.

No.Yrs=Consecutive years of higher dividends; DGR=Dividend Growth Rate; *Offers Company-sponsored Dividend Reinvestment/Stock Purchase Plan. Unlike brokerage “DRIPs,” these allow cash investments of as little as $25. For a list of No-fee company-sponsored DRIPs, click here.

— David Fish

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David Fish, Moneypaper

Dave Fish is Executive Editor for the Moneypaper newsletter and co-manager (since 1999) of the MP 63 Fund (Symbol: DRIPX), a Morningstar 4-Star fund that invests exclusively in companies that offer Direct Investment (or Dividend Reinvestment) Plans, or DRIPs. He is also the author of the U.S. Dividend Champions spreadsheet (and PDF), which is updated at the end of each month...and lists companies that have increased their dividend payout for at least 25 consecutive years. (Separate tabs list "Contenders" that have increased their payouts for 10-24 years and "Challengers" that have increased their payouts for 5-9 years.)