The Simple Strategy to Pick Top Dividend Stocks
June 20, 2018
This Strategy Beats the Market
Today, I want to share with you a simple formula to build a portfolio of elite dividend stocks.
And not just any dividend stocks, it’s worth pointing out. I’m talking about dividend growth stocks. High-quality businesses with a track record of steady, rising payouts.
The best part? This formula is so simple, a fifth grader could figure it out. And if you decide to use it in your portfolio, it only takes a few minutes each year to manage.
Let me explain.
When I first got interested in dividend stocks, I became a big fan of mutual fund manager Tom Cameron. Years ago, he used to manage the aptly named Rising Dividend Growth Fund. Before Goldman Sachs Group Inc (NYSE:GS) acquired his firm, Cameron delivered a 4.6% compounded annual return for his investors between 2006 and 2011.
At first glance, that might not sound too impressive. But you have to remember that this time period was the toughest one for investors in living memory. Squeezing out a modest profit during these years was actually an impressive feat, as evidenced by the fact that Cameron’s fund outperformed 98% of his peers.
So, how did he do it? Cameron developed the “10-10 formula” to search out the best dividend growth stocks in the market. His strategy called for buying stocks that have raised their distributions for at least 10 consecutive years, as well as increasing their payouts by at least 10% per year over the previous decade.
Needless to say, Cameron had a strict formula here. If a company skipped a dividend hike even once, he wouldn’t consider buying it for another decade. By screening out all but the very best stocks in the market, Cameron managed to beat the market most years.
Why so much focus on dividends? Firms with long histories of distribution growth have made obvious commitments to their shareholders. And when a company has to mail out a check to investors each quarter, management is far more careful about where they allocate their investment dollars.
Higher dividends are also a sign of confidence. Executives, after all, loathe cutting their distributions once a payout level is established. Management would only risk boosting the payout if they were bullish on their company’s future prospects.
So, with the 10-10 formula in hand, I wanted to screen for another batch of top dividend growth stocks.
My screen revealed 134 U.S.-listed companies, all worthy of further consideration. But, rather than list every single business, I decided to highlight just a few of my favorites. You can see the results in the table below.
|
Company Name |
Consecutive Years of Dividend Increases |
10-Year Dividend Compound Annual Growth Rate |
|
Raytheon Company |
14 |
12.0% |
|
Digital Realty Trust Inc |
14 |
12.5% |
|
CSX Corporation |
14 |
15.8% |
|
Enbridge Inc |
22 |
12.4% |
|
Hormel Foods Corp |
52 |
16.3% |
(Source: The DRiP Investing Resource Center, last accessed June 15, 2018.)
No surprise here. A number of longtime Income Investor favorites showed up on the list, including Raytheon Company (NYSE:RTN), CSX Corporation (NASDAQ:CSX), and Hormel Foods Corp (NYSE:HRL).
During my screening process, I look for wonderful businesses paying out steady, rising streams of income. So, it should come as no surprise to readers that so many previous picks would come up in a list of elite dividend stocks. This exercise, though, did reveal a few new names worth investigating further.
Take Canada-based Enbridge Inc (NYSE:ENB), for example. New drilling technologies have unlocked vast supplies of oil and gas across the continent. This has created huge demand for new energy infrastructure, from pipelines and storage facilities to terminals and processing plants.
As one of the largest energy pipeline owners on the continent, Enbridge collects a toll on every barrel that flows through its network. And, as you can see in the table above, this has resulted in a fast-growing stream of income for shareholders.
Digital Realty Trust, Inc. (NYSE:DLR) also looks interesting. The company owns hundreds of data storage facilities around the world, which it leases out to tech companies in exchange for monthly rental income. And with more and more activities moving online, demand for such facilities has soared over the past few years. This has pushed down vacancy rates and has increased rents across the industry.
To be clear, the table above doesn’t constitute a list of “buy” recommendations. Some of these stocks look expensive at the moment, so I wouldn’t be keen on putting fresh money to work in them right this second. And, given that the 10-10 formula screens out some really great stocks, I wouldn’t use this approach as a binding strategy.
That said, the companies that pass the 10-10 test have shown a real commitment to their investors. And the screen did reveal a number of top investment candidates. For this reason, I pull it up often when searching for new investment ideas.
