Yesterday was yet another interesting - for lack of a better word - day for the markets. The 10 Year Treasury breached the 3% level for the first time in more than four years, and the S&P 500 closed down more than 1%, the 30th time in the past 61 trading days that the index has closed up or down more than 1%. Some bigger names, such as 3M (MMM) , Lockheed Martin (LMT) , and Caterpillar (CAT) reported earnings, and for one reason or another, the markets were not pleased, sending each down more than 6%.
The 10-Year's move above 3%, which is believed to be a "psychological" level by many, may be unwelcome competition for dividend paying stocks, especially if it continues to head higher. One potential strategy for dividend seekers is to identify stocks that have historically increased their dividend payouts, and may have the wherewithal to continue to do so.
To that end, I've screened for stocks with the following criteria:
- Minimum Market Cap: $500 Million
- Minimum current yield: 3%
- Have increased dividend for at least the past five years
- Payout Ratio for each of past two years is below 70%
- Five year compound annual dividend growth rate greater than 5%
Twenty two names made the cut, and I will create a tracking portfolio to monitor performance moving forward, in order to see whether the concept has merit in an increasing interest rate environment.
Meanwhile, here are some of the qualifiers:
General Mills (GIS) - Cereal name currently yields 4.4%, and has been growing the dividend at a 9.5% clip (5 year compound annual growth rate). Payout ratio over the past year is 51%. Stock is down 24% year to date. Company is raising $1 billion in equity to fund the purchase of Blue Buffalo Pet Products; the market does not appear to be crazy about the deal at this point.
Clorox (CLX) - Consumer Products name currently yields just over 3%, and has grown the dividend at 5.6%. Another company that has taken it on the chin recently, shares are down 22% since late December.
Kohl's (KSS) - Retailer, an Action Alerts PLUS holding, which has continued to flourish in the anti-retail environment, yields 4.1%, and has grown the dividend at 13%, while keeping the payout ratio below 50%. Frankly, I don't know how they've been so successful; the stores look like those that I frequented in the 1970's, but the company has obviously mastered the inventory game.
Ethan Allen Interiors (ETH) - By far, the smallest name on the list with a market cap just north of $600 million. Currently yielding 3.4%, the dividend has grown at a 19% clip over the past five years. The company has a solid balance sheet with no debt, and $1.50 per share in cash.
I will publish the entire list in a future column, and will begin tracking its progress (or lack thereof) in order to determine if the concept of buying dividend growers can bear fruit as the Fed raises rates, and investors have other, seemingly safer choices for yield.
