The Best Dividend Growth Stocks For Uncertain Times
You probably don’t remember what you were doing on May 6, 2010.
But I’ll never forget that day.
The Dow sank almost 1,000 points in 45 minutes.
Then, an hour later, it came roaring back, up 750 points. Over the next three weeks, it lost another 525 points.
So how about this 2015 market?
How are you dealing with the wild swings, the volatility we’ve been hammered with?
Up and down, again and again. Then a few steady stretches just to keep us off balance.
You know what? It’s like Hyman Roth says in “The Godfather”…
“This is the life we have chosen.”
(Or was it Godfather II?)
Anyhow, with the whipsaw whirring away nonstop, what’s an easy way to find the best dividend growth stocks?
Pay attention to history. Instead of listening to rosy predictions about the future, none of which put food on your table, take a good, long look in the rear view mirror.
If there was just one thing to look at, here’s what it would be. How good a job a company does improving its earnings quarter after quarter, year after year.
When earnings grow over long stretches of time, you’ve got the foundation for dividend growth, and growing dividends are what you want.
Here’s a quick history lesson. I’m in a nostalgic mood, so let’s return to the years of the Reagan White House and take a look at two of the great stocks of the 1980s.
Philip Morris and Merck $MRK. Not a bad pairing… one company gets you sick and sends you to the hospital, the other one tries to get you better and sends you home.
(Nowadays Philip Morris is Altria $MO.)
Back in 1980, when the Air Supply song “Lost In Love” was on the radio, and Ronald Reagan and Jimmy Carter were on the campaign trail, Philip Morris generated earnings per share (EPS) of $0.20. Merck was making $0.28.
By 1988, when President Reagan was getting ready to move back to his California ranch, Philip Morris EPS were $0.74 and at Merck they were $1.02.
What did this do to the dividend? Factoring in the compounding from reinvested dividends, by 1988 the total dividend return for Philip Morris was 17.9%. At Merck it was 11.0%.
What makes the dividend yield so big?
The compounding. If you held these stocks for just eight years, you didn’t just have the earnings driving dividends higher. You piled dividends on top of dividends to compound your return.
That’s why a trip back to the past isn’t a bad trip to take. You see how a company performs, instead of what it promises. This is one of the best things you can do to find the best dividend growth stocks.
And you’re reminded that hanging onto your best dividend stocks is a smart move.
But what about right now?
Where do you find the dividend stocks so everything’s in place for the dividends to keep growing?
Easy Arithmetic Points To The Best Dividend Growth Stocks
The easy arithmetic looks like this.
It’s easier to achieve percentage growth when you start with a small number.
For instance, 50% revenue growth is a lot easier when you’re going from $10 million to $15 million than when you’re going from $20 million to $30 million.
You only need half as much money. The more the revenue grows, the harder it is to keep growing.
It’s just plain common sense.
But common sense seems to go out the window quite often. Look at China. For years, the Chinese economy cranked out dazzling growth rates.
Starting in 2003, China’s Gross Domestic Product (GDP) was growing at a 10% clip… or more… for seven years in a row.
Then, in 2008, it went down to 9.6%. Today, it’s at 7.4%.
This doesn’t mean there’s something sick about the Chinese economy. It’s simple arithmetic. Sustaining strong growth gets tougher as the years go by, and you need to build on bigger and bigger numbers.
The same thing holds true for dividend investors.
You want to look for dividend growth that can build on a reasonable number. A lower percentage yield.
If a company is paying a 2% yield, cuts you a dividend check for $1 a year, and has a dividend payout ratio of 30%, you’re looking at a pretty nice situation.
Here’s why.
The dividend probably has lots of room to grow. The yield is already reasonable. 2% is nothing special. It’s conservative, and you’re eliminating risk.
And the dividend payout ratio is also low, which is great. This means the company has plenty of money to increase the dividend if it wants.
Want an example?
Go To Vegas To Find One Of The Best Dividend Growth Stocks
Check in at the Wynn.
Just stay away from the casino, because you’ll probably do a lot better with the Wynn Resorts stock $WYNN.
The yield is low at 1.85% and the dividend payout ratio is in good shape, 42.4%.
A great example of a conservative yield and a payout ratio that’s not too high.
That’s one of the dividend ratio payout secrets it’s good to know.
But will the dividend grow?
If you like Wynn’s prospects, if you think earnings will grow and there will be plenty of cash to pay the bills, yes.
If you have some doubts about this, then hold off.
You’re not going to find meaningful dividend growth unless you’ve got earnings growth to back it up.
What Should You Pay For The Best Dividend Growth Stocks?
Here’s what you should look at next when you look at stocks like Wynn Resorts.
Can you make a good deal on this stock, that’s trading at 108?
The Price to Earnings Ratio (P/E Ratio) gives you a good indication. Wynn’s P/E Ratio is 23.77. The market PE is 18.
Are you buying at or near a market high?
Nope… look at the skid Wynn has been on.
But you know what? When you look at the chart and go back a few years, you’ll see that even though the stock is well off its highs, it could easily give up some more.
I’m not one for trying to time the market. It’s a tough game to play.
But a lot of smart investors will tell you… “The trend is your friend.”
Or…
“Never try to catch a falling knife.”
When you see the price of a dividend stock like this heading down, don’t rush in. Don’t assume it’s going to turn around run back up.
It could give up give up more ground just as easily as somebody could give up their paycheck at one of Wynn’s blackjack tables.
You’re usually better off waiting for a stock to start heading back up, and showing some signs of life before you rush in.
You don’t have to turn yourself into a nerdy technical analyst and wallpaper your world with charts.
Dividend investors don’t have to obsess with “entry levels” for their buy prices like day traders do. That’s because we have more time on our side, time for a stock to edge back up.
But it’s good to have a feel for history.
Know where your dividend stock has been and how it behaves.
This is one of the ways you’ll be able to find good dividend growth stocks.
Regards,
Michael Jennings
Dividend Stocks Research
Note: Michael Jennings writes and edits DividendStocksResearch.com. Sign up for our free dividend reports and dividend newsletter at http://www.dividendstocksresearch.com/free-sign-up. We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.
Category: Dividend Stocks
