This Dividend Growth Stock Offers Considerable Upside with Little Downside Risk

Dividends are sticky.

When management announces a dividend increase, the last thing it wants is to rescind the increase. Competent management will announce a dividend increase only if it’s supported by business prospects.

As the dividend goes, so, too, should go the share prices. After all, the dividend is a signaling mechanism. Data compiled by Ned Davis Research show a strong correlation between dividends and share-price performance. Dividend growers and initiators have historically performed better than other stocks, regardless of market conditions.

CaptureMy own experience has shown the stronger and more persistent the dividend growth, the better the subsequent share performance. I’ve seen particularly strong subsequent share-price performance with stocks at both High Yield Wealth and Personal Wealth Advisor that have seen double-digit dividend growth.

[ad#Google Adsense 336×280-IA]For example, Target Corp. (NYSE: TGT), a former High Yield Wealth recommendation, raised its dividend payout 21% in 2014.

Over the subsequent 12 months, Target shares rose 41%.

When Apple (NASDAQ: AAPL), a current Personal Wealth Advisor recommendation, raised its dividend 16% in 2013, its shares rose 58% over the subsequent 12 months.

Cisco: A Double-Digit Dividend Grower

There are other dividend-growth success stories in both portfolios. Cisco Systems (NASDAQ: CSCO) is the latest. Cisco is both a High Yield Wealth and Personal Wealth Advisor recommendation, and it recently raised its dividend. Investors are already reaping the benefits.

On Feb. 10, Cisco announced the quarterly dividend would be increased 24%. Cisco shares opened the next day up 9%. All told, Cisco shares are up 17% over the past two weeks.

I expect that Cisco shares will continue their ascent, because the dividend is never the whole story. Good news on the dividend front is always accompanied by good news elsewhere. When Cisco announced its new-and-improved dividend, it also announced it would add $15 billion to its current stock repurchase program.

More dividends and more share repurchases should be supported by financial results. On that front, Cisco’s $11.93 billion of revenue for the latest quarter came in 2% higher than most analysts expected. Earnings per share also beat on the upside, posting at $0.57.

Past investments are also paying off. Last year, Cisco announced it would invest $10 billion in China over a number of years. Revenue in Asia, of which China is a major component, increased 11% in the past quarter. This is despite the recent slowdown in China’s gross domestic product growth and the headwinds of an appreciating U.S. dollar.

New growth opportunities reside in the clouds. Cisco’s Meraki Cloud Services is a leader in cloud controlled Wi-Fi, routing and security. It’s expected to be a $1 billion-plus run-rate business this year. That means it will post 50% compounded annual growth.

In short, Cisco has a lot to offer: new growth opportunities; improved margins (both gross and operating margins are at the highest levels in years); a big stock buyback program; and a rock-solid capital structure, with no debt and $54 billion in cash and cash equivalents. And then there is the dividend, which continually grows and which yields close to 4% at the new payout rate.

If past is prologue – and I believe it is – Cisco shares offer considerable upside opportunity with little downside risk. For that, we can thank the double-digit dividend growth and the outlook for business it portends.

— Stephen Mauzy

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Source: Wyatt Investment Research