Wouldn’t it be fun — not to mention financially beneficial — to predict a Champion years in advance?
No, this isn’t about Biff Tannen stealing Doc Brown’s DeLorean, traveling back in time and getting rich by betting on sporting events for which he already knew the outcome.
It’s about predicting the next Dividend Champions — U.S. companies that have been growing annual payouts to shareholders for at least 25 consecutive years.
Of the thousands of publicly traded American companies, only 118 are Champions, says Daily Trade Alert contributor David Fish. He also maintains lists of Contenders, companies with 10-24 consecutive years of dividend growth; and Challengers, with 5-9 straight years.
In all, nearly 900 companies populate Dave’s “CCC lists,” which are popular launching points for Dividend Growth Investing practitioners who are researching potential buys.
IBM (IBM), with 22 years of dividend growth, and J.M. Smucker (SJM), with 20, are others I’m quite certain will get to 25+.
Those calls are too easy, and I’m always up for a challenge. So I’m going to take a stab at some future Champions that are not on the doorstep of Championhood.
I have chosen a dozen U.S. companies, 3 each from the following categories:
- Contenders with current streaks shorter than 15 years;
- Newer dividend payers that have not yet reached Challenger status;
- Companies that have never distributed income to shareholders.
Obviously, the shorter the streak, the more speculative the call is on my part.
I also looked for low payout ratios and for industry leaders with competitive advantages (moats).
Please note that this is not meant to be anything close to a complete list, as there literally are dozens (maybe even hundreds) of potential Champions.
I simply tried to select an interesting, diverse group of companies that I think have a chance to get to the magic 25 number … and are worthy of further research regardless of their dividend status.
Here are my dozen picks, in order of current dividend-growth streaks. Contenders are in green, Challengers in blue, dividend newbies in light orange, and no-dividend stocks in yellow.
Here are a few other relevant metrics that contributed to my selections:
Income Builder Portfolio Material?
Every month, using $2,000 provided by Daily Trade Alert, I buy two stocks for the real-money DGI portfolio we’re building.
In the last column of the above table, headed “IBP,” I rate the likelihood that I eventually will buy each company. A 10 means almost surely will, a 1 is almost certainly will not.
COSTCO (6-IBP): As I wrote earlier this year, this is my favorite brick-and-mortar retailer. Its business model is second to none — millions of customers pay just for the right to spend more money in its warehouses. The yield is low, however, and COST’s free cash flow has been inconsistent. Plus, it almost always commands a premium price.
COMCAST (7-IBP): I’m impressed by this company’s 15 consecutive years of EPS growth and its 500% increase in its dividend over the last decade. Given the rapid changes going on in its industry, the likelihood of CMSCA joining the IBP will come down to whether I will want a media stock.
LOCKHEED MARTIN (7-IBP): It froze the dividend during the recession, so LMT is no sure thing to get to 25 consecutive years of income growth. But our world is addicted to weapons, so the company is an attractive IBP candidate.
HOME DEPOT (9-IBP): Strong free cash flow and dividend growth, an Amazon-resistant business, and the best yield of the bunch. Yes, it’s in a cyclical industry, but over time this company rarely disappoints. I much prefer HD to top competitor Lowe’s (LOW).
MASTERCARD (6-IBP): Forming a duopoly with its rival, Visa (V), MA checks a lot of boxes. Despite its low, low yield and its high, high valuation, Mastercard eventually could compete with Visa for a spot in the IBP.
APPLE (10-IBP): Frankly, I will be surprised if the IBP doesn’t add AAPL before the end of the year. The company is a FCF machine with a low payout ratio that suggests years of dividend growth ahead. Future Champion? I’ve learned not to doubt the world’s most valuable company.
MONDELEZ (6-IBP): It’s done OK, but not spectacularly, since being spun off from Kraft in 2012. It has a fine product line, significant international coverage, a wide moat and new management. I have to decide if the IBP already owning Pepsi (PEP) would make MDLZ redundant.
CONSTELLATION (6-IBP): Booze stocks have outperformed over the decades, and STZ has popular products such as Corona beers and Robert Mondavi wines. It’s more speculative, however, with middling credit and safety scores, low yield, bumpy FCF growth and high valuation.
COGNIZANT (6-IBP): A very interesting technology services stock — made even moreso by the dividend it initiated last year. Amazingly, Cognizant has grown annual earnings for two decades (see FAST Graphs image below), and it also has outstanding FCF. If we want to take a flyer on a “growthier” dividend newby for the IBP, we could do a lot worse than CTSH.
ALPHABET (6-IBP): When I Googled “google dividend,” I got 6.57 million results, with the first being: “Should Google Pay A Dividend?” Hello! Yes! Google’s parent company is omnipresent, it grows earnings and FCF like crazy, and it has a near-perfect credit rating. Heck, I might buy GOOGL for the IBP even if the company keeps depriving the world of Divvy Dollars.
DOLLAR TREE (1-IBP): Many other discount retailers pay dividends, so it’s reasonable to think DLTR might join them one day. Although it’s hard to imagine I’d choose this company over Costco or TJX (TJX), it does have a nice record of growth and could interest non-DGI types.
MONSTER (4-IBP): It’s difficult to justify MNST for an income-centric portfolio, but I could be tempted by its 14-year streak of annual EPS growth. Someday, maybe Monster will follow the lead of Pepsi and Coca-Cola (KO) and start paying a dividend.
Valuing All Kinds Of Growth
Periodically, Value Line comes out with a list of 100 “Highest Growth Stocks,” with the criteria as follows:
To be included, a company’s annual growth of sales, cash flow, earnings, dividends and book value must together have averaged 10% or more over the past 10 years and be expected to average at least 10% in the coming 3-5 years.
Eight of the 12 companies I’ve chosen as potential Champions made Value Line’s most recent list of consistently high growers: GOOGL, AAPL, CTSH, CMCSA, STZ, DLTR, MA, MNST.
Wrapping Things Up
Trying to predict long streaks of dividend growth — especially among companies with little to no track record of income production — is probably a fool’s errand.
Five years ago, if you saw cigarette-maker Lorillard on a list like this, you might have nodded in agreement. But the company ended up getting bought by Reynolds American, which in turn was acquired by British American Tobacco (BTI). Just like that, Lorillard went from potential Dividend Champion to yesterday’s news.
I can envision Mondelez, Monster, Dollar Tree, Constellation and maybe even Comcast being takeover targets well before they have dividend streaks worth mentioning.
Additionally, even strong companies sometimes face balance-sheet issues that force them to freeze dividends.
Still, making long-range forecasts is always a fun challenge, and it also was a valuable exercise in evaluating possible IBP candidates.
As always, I urge all investors to conduct their own thorough due diligence.
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Disclosure: I own AAPL, COST, HD, LMT, MA and MDLZ in my personal portfolio.