Today I’m going to show you 2 easy ways to set yourself up for safe double-digit yearly dividend growth and invite quick 100%+ upside too.
I’ll also reveal a blue chip stock that’s delivering both strong price gains and rising dividends. It will have you pocketing a nice 5%+ yield in short order.
So let’s get going, starting with…
The Dividend-Growth Signal Most People Miss[ad#Google Adsense 336×280-IA]If you’ve been buying dividend stocks for a while, you probably know about the payout ratio.
It’s a sacred cow for many folks; you calculate it by dividing the total amount of dividends paid by the company’s last 12 months of net income.
If it comes out in the neighborhood of, say, 50% or less, you’ve got a safe dividend that’s likely to grow. As you get climb closer to 100%, the noose around the payout gets tighter.
Problem is, earnings are an accounting creation. They often have little relation to the actual cash the firm is making!
Earnings can be easily manipulated to overstate cash flow generation. But they can, at times, understate it too.
Take Pfizer (PFE), a drug stock I analyzed a few months ago. If you went by its net income–based payout ratio of 101%, you’d want to stay well away. By that measure, the pharma giant is paying out more in dividends than it’s earning—a disaster in the making!
Not so fast. Because you really need to look at the free cash flow payout ratio here.
Free cash what?
We don’t have to get too deep in the weeds, but suffice it to say, free cash flow (FCF) tells you how much cash a company is generating once it’s paid the cost of maintaining and growing its business.
You calculate it by subtracting capital expenditures from a company’s cash flow from operating activities (both figures are available under the “Financials” tab on Yahoo Finance).
And when you look at Pfizer’s dividends as a percentage of FCF, the picture looks a lot brighter:
At 54%, Pfizer’s FCF payout ratio is right in my “safe” zone; it’s a stock with plenty of dividend-growth juice left. The company’s cash-flow generating power was indeed understated by its earnings numbers.
Now I know what you’re probably thinking here: “I thought this article was supposed to help me find cheap 5% yielders, and Pfizer pays just 3.7%. What gives?”
That brings me to the next thing many dividend hounds ignore.
Beyond the Dividend Yield
When it comes to dividends, many people simply dial up a stock in Yahoo Finance or Google Finance, check out its current yield and leave it at that.
To be sure, current yield is important, but it’s just a snapshot in time. We need to focus on future yields.
To show you what I mean, let’s look at Pfizer again. Over the past five years, its yield has stayed in a tight range, from around 2.9% to, very briefly, just north of 3.9%.
That won’t get your average income fan’s pulse racing.
But what current yields don’t tell you is that management has hiked the quarterly payout by 45% in that time, and the stock’s price has jumped at roughly the same pace.
And because you calculate yield by dividing the yearly dividend by the current share price, the current yield has gone nowhere.
But roll back the curtain and you’ll see the impact of that payout growth on your yield on investment—and it’s shocking. Instead of 3.7%, you’d now be pocketing a nice 5.6% on your money if you’d bought PFE back in 2012.
This phenomenon is hardly unique to Pfizer. You’ve probably noticed that the yield on most of your favorite Dividend Aristocrats rarely changes meaningfully.
The good news is we can use that to our advantage, because it’s shining a light on something almost everyone overlooks: the direct connection between a rising payout and a rising share price.
There’s no clearer example of that than Pfizer, whose share price and dividend have marched upward in lockstep over the past five years, with each one up nearly 50%!
That’s no coincidence, and it tells us that if we buy stocks with sterling dividend histories and safe FCF payout ratios, we’ll give ourselves a great shot at serious price gains too, especially if we hold on for the long haul.
Even better if we can buy cheap, and with Pfizer, we can: the stock trades at just 15.2 times trailing-twelve-month FCF, well below rivals Johnson & Johnson (JNJ) at 22.9 and Abbott Laboratories (ABT) at 27.6.
— Brett Owens
A 50% gain in 5 years is nice, but we can do a lot better if we zero in on stocks with the same strengths as Pfizer but double the dividend growth.
I’m talking about companies handing their shareholders 15% to 20% payout hikes every single year, so your income stream will quickly expand by 100% or more. And as I just showed you with Pfizer, the share price will be forced to follow suit!
I’m pounding the table on 7 such companies now, and I’ve put all 7 in a NEW special report—“The 7 Best Dividend Growth Stocks With 100%+ Upside”—YOURS FREE.
Here are just a few of the stocks you’ll discover in this breakthrough FREE report:
- The water company that’s turning every $1 in sales into $10 in free cash flow. This one could easily give shareholders a nice raise today—and its next dividend hike will be BIG.
- The self-storage operator that’s hiked its dividend TWICE in the past year. At this rate, it will double its payout in 4 or 5 years, turning our 4.3% yield into a reliable 8.6% income stream!
- The 800% dividend grower: This ignored company has boosted its payout eightfold in just four years, and it’s just getting started! Plus, management is jumping on the stock’s absurdly cheap valuation, carefully using share buybacks to set us up for even bigger gains.
- PLUS 4 more stocks with surefire 100% dividend growth ahead.
I’m ready to show you all 7 of these standout companies now. All you have to do is click here to get my full dividend-growth strategy and your own copy of this eye-opening special report.
Source: Contrarian Outlook