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It's The Growth. . . 12/10/14

It's the Growth. . .

Among the variety of things we don’t like about market pundits and money managers is their tendency to divide stocks into two primary “types,”-growth and value. An investor might be exposed to one or the other category depending on what is thought to best fit his or her portfolio needs. While this approach may make it easier to make investment decisions, it probably serves the advisor more than it does the investor.


We have always maintained that the best companies exhibit qualities of both growth and value, and that they tend to do so consistently over time. As sales and earnings grow the value of the company grows along with growing dividends. It's too simplistic to peg low-yielding stocks as growth stocks and high-yielders as value stocks-which is a shortcut that is prevalent in the financial industry.


In general, the best choices for any portfolio are stocks that grow not only sales and earnings, but also dividends and capital gains-and do so on a steady basis, often for decades. In other words, growth creates value. But even among the best companies, it's important to understand that different companies grow in value in different ways. Some have consistently generous yields, whereas others provide capital appreciation, which can be a step ahead of the dividend growth.


It’s true that dividend yield is a tempting attribute. We tend to include a minimum yield requirement when we evaluate stocks-and we tend to favor stocks that reward shareholders with high dividends. But dividend yield is only part of the story. Strict adherence to a high yield strategy will cause you to overlook some excellent prospects. Some great companies have fairly low yields. Based on a steadily rising stock price, the dividend will naturally provide a smaller yield. That’s not all bad!


For this submission, I’m including a selection of DRIP companies (that is, companies that offer direct investing to existing shareholders) that provide both value and growth. To do this, we applied a variety of criteria to Moneypaper Executive Editor David Fish’s database of companies that have recorded consistent dividend growth for at least five years-589 companies in all. Our methodology was as follows:


At the end of November, there were 105 “Dividend Champions”, which are companies with 25 or more consecutive years of dividend increases; 246 “Dividend Contenders,” companies with 10-24 years of higher payouts; and 238 “Dividend Challengers,” companies with 5-9 years of increases. Of these, 267 offer DRIPs, so that was our starting “universe” for screening purposes.


Why did we limit our selections to DRIP companies? Companies that accept direct investments make it easy for people to follow a dollar-cost averaging strategy-a very sensible way for long-term investors to build a position in a company.


From this list of 267, David eliminated 11 companies that had gone more than 12 months since their last dividend increase and three companies that are being acquired, which left us with 253 candidates. These were sorted by yield, low to high. We discarded companies with yields above 2.77% (which is the average yield of the 589 in his database). That left us with 143 companies. (Our thinking is that above-average payers might not have as much room to grow the dividend.)


The remaining candidates were sorted by their 5-year Dividend Growth Rates, high to low, since we wanted to insure that the yields weren't relatively low because of “stinginess” on the part of the Boards of Directors.” Again, we chose to eliminate companies with DGRs below the average, which is 10.2%. Our field of candidates is now the 70 remaining companies.


Since earnings are the source of both dividends and capital appreciation, we next sorted the stocks by their Estimated Earning-Per-Share Growth for the next five years and dropped any company that would not match the 10.2% Dividend Growth Rate, which reduced our candidates to 39 companies.


As a final step, we eliminated companies with Price/Earnings ratios above 23-keeping in mind that some of the highest-quality corporations deserve a high ratio since growth will likely push the shares higher still. What’s more, that strong growth also fuels above average dividend increases, offering the investor more “bang for the buck.”


The 16 “High Growth” companies that survived our screening appear (alphabetically) below. They run the gamut from Food Processing and Agriculture to Financial Services, Machinery, and Retailers, offering a well-diversified “Total Return” package.


The 16 high growth companies that survived our stringent screening process area as follows: Ameriprise Financial, etc.

To view the dividend growth rate, P/E, Payout Ratio, Dividend Yield, and Price, you may click here to access the chart.