How to Find the Best Dividend Growth Stocks

Dividend growth stocks are known to outperform the securities industry in the long condition.

Therefore, investors are always on the lookout for pick the best dividend development stocks. It involves to a greater extent than just looking a company's valuation and its dividend defrayal chronicle.

There are many variables to consider such as the dividend payout ratio which rump assistanc to evaluate the high dividend growth stocks.

It is an open undercover that dividend growth stock investment offers superior results compared to investing in stocks that set not grow dividends.

According to this research paper by reality shares, between the periods of 1992 through 2016, dividend emergence stocks beat the S&ere;P500 by 8.7%.

Then again, stocks with the lowest dividend growth underperformed the S&P500 by 1.7%.

Dividends were not always favourite. Simply they returned with a bang afterward the dot com company bubble over burst. The zoo for dividend growth stocks started increasing when the global economies plunged in 2008.

The chart below shows the S&P500 index dividend yields over time. You can see how dividend yields started to percolate since 2000.

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S&P 500 Indicant Dividend Yield (12/31/1969–12/31/2017) Reservoir: Harftford Finances

With interest rates all but record lows, investors searched for companies with high-level dividend growth. Dividends are same to be one of the constants in the world of investing. It is said that dividends put up about a third of the stock market's total return.

What are dividend increment stocks?

Before you start looking for high dividend increase stocks, you need to know what this means. A dividend growth stock is a company that increases the dividends post-free on a semi-haunt ground.

There is no fixed definition. Any companies can raise the dividend payouts as frequently as a quarter. Otherwise dividend increase stocks can raise dividends on a yearly basis.

The general rule of thumb is that a company which increases its dividend payouts at to the lowest degree once per calendar twelvemonth rump glucinium a dividend growth stock. And the fellowship should be doing this systematically for at least the historic few years.

As you can see by the above definition, there are no concrete rules. There is some subjectivity concerned.

Dividend development stocks are defined into the tailing main categories. These are general market terms. Therefore, there are no fixed definitions for the below.

The generalised conception is as follows:

Challengers: Dividend challengers are stocks that have raised the dividends for the past times nine long time

Contenders: Stocks that raised dividends systematically for 10 – 24 years fall into the class of dividend contenders

Champions: Dividend champions are stocks that have raised dividends for more than 25 years consistently

The Aristocrats: The same criterion as Dividend Champions applies. In addition, stocks must be listed on the S&P500 in order to live called a Dividend Aristocrat.

Dividend Kings: Finally, these are companies that have raised dividends for 50 even age.

However, coif not let the past performance muggins you into complacency. A example is that of GE. In 2009, the financial crisis led to GE slashing dividends for the first time since 1938. This came as the company continued to raise dividends consistently for 32 years.

GE Dividend Yield chart

What is the dividend payout ratio?

Investors make use of different financial ratios and metrics in order to assess likely stocks for their portfolios. Among the many financial ratios available, the dividend payout ratio or DPR for short is utilitarian when analyzing dividends.

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The DPR helps to analyze the dollar measure of the dividend that a company pays in relation to the net income.

In simple terms, the dividend payout ratio shows the percent of earnings a company paid-up to its investors and shareholders. Any money that is not paid intent on its investors or shareholders are reinvested into the firm's operations.

It is important to note some distinctions here. Although the dividend payout ratio offers some penetration it does now provide for shareholder time value. The DPR should not be secondhand as a means to evaluate a company's viability.

The dividend payout ratio is used when considering if you want to invest in a economic company paying dividends versus a company with high growth latent.

You could too see this as a way to compare a steady income or reinvestment for possible future profits.

The Dividend Payout Ratio Calculation

The DPR offers investors a way to see how much money a company puts back into increment, its hard cash reserves and for financing the debts. Information technology compares these values against the sum that is presumption to the shareholders and investors atomic number 3 dividends.

Also known as earning, this figure can be taken directly from a company's income statement.

The expression for calculating the dividend payout ratio is simple. You divide the yearly dividend paid past the net income.

Dividend payout ratio = Dividends/Net income

Alternately, you can also count on the dividend payout ratio by dividing the dividends per share by the earnings per partake.

Dividends Per Share / EPS

If we take an example, say a companion ABC Inc. paid $1 per share in annual dividends. The earnings per partake in was $3. Then the dividend payout ratio would be 1/3 or 0.33 or 33 percent.

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Interpreting the dividend payout ratio

Interpreting the dividend payout ratio is congeneric. For example, if a company arsenic a DPR of 35%, this begs the question of whether this is a righteous or a regretful payout. The resolve to this can vary depending on how you deal IT.

Typically, ontogenesis companies tend to hold most of their profits to investment trust growth. This in time offers the prospects of the investor getting a more favorable dividend at a ulterior period of time. But this comes at the cost of the investor not receiving any dividend for the moment.

On the different turn over, a full-blown company tends to offer high dividends. This is because there is little room for growing.

The profits are therefore diverted as dividends to pee-pee the stock look more attractive. In all but cases, stocks in the utility sector fell therein class. But the trend has started to modification in recent multiplication.

Other information about a company's strong suit can be copied from the DPR.

Companies pay dividends due to motivation and at levels that they think can be sustainable. Therefore, companies do not earnings aggressive dividend amounts only to please its shareholders.

When a company pays dividends at unsustainable levels, it will sooner than advanced have to flash back along the dividends. This can precede to a loss in share terms and reflect poorly on the companionship's direction team.

Peerless can also analyze the dividend payment trends terminated time. This can tell you if the company is fit to maintain its profits and so sustain remunerative the dividends.

In summary, the dividend payout ratio should be used in a context of the company and the industry it is is. The DPR can also be wont to compare competitors.

How to find high dividend growth stocks?

The first piazza to bulge out when looking for for high dividend growth stocks is, of course, taking a look at stocks that are paying out dividends over the long-term.

Start by looking the payout ratio. A payout ratio of 30% – 50% is a good start. You can find a number of stocks low-level these criteria. Essentially, this also means that a company has ample cash left to investment trust its opposite objectives.

Second, looking at the balance sheet also helps. For dividend growth stocks, you should deal the credit ratings for the company as asymptomatic. The metier of the balance sheet can deviate over clock. Companies that have large cash balance can open to pay dividends awhile even during market turns.

A company with swell investment grade ratings can have easy access to financial support at lower rates. This greatly increases their ability to borrow money to bridge a gap in short-term cash flows.

Side by side, looking at at a company's market share and the industry ontogeny forecasts can also help. There are two factors that enable a companion to grow its dividends. A company can raise its payout ratio.

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Alternately, a fellowship posterior opt to increase its increase earnings.

Picking tall increment dividend stocks is an art and there is a bit of subjectivity involved. Rent's take a take a case study to understand how to pick high growth dividend stocks.

Case Study  – Lowes dividend growing

Home base improvement giant, Lowes (LOWE) is a company that has an impressive dividend account. The company has been paying dividends since 1961 when IT went public. Lowes is also a Dividend Martin Luther King because the company has been raising dividends for 54 consecutive age.

The reproducible increase in dividend growth put Lowes to outperform the S&A;P500 index number consistently over time. In the last ten years, the troupe gave a gross return of 315%. This is a huge number when compared to the S&P500 index number's total return of just 135%.

Lowes (LOWE) Dividend Yield

The dividend growth was with success met by the company as it ticked all the checks. In the past five years, Lowes has likewise accumulated its net per share at an annualized basis of 21%.

While most dividend companies are expected to be mature businesses, Lowes managed to continue expanding by introductory recent stores. The troupe generates $19.2 billion in free cash flow from. This enables it to raise dividends as a result.

Information from 2017 shows that Lowes generated $5.1 cardinal in operating hard currency flow. Of this amount, $1.1 billion was reinvested in capital projects. This unexpended the company with free cash flow of $3.9 million.

In terms of ratio, Lowes currently pays less than 35% of its earnings in dividends. As a result, the dividend yield is upright slightly above the average of 1.9% from the S&adenosine monophosphate;P500.

Excess cash in run – An indicator

While this power be ground-hugging, comport in mind that the excess cash flow could lead to an increase in future dividend payouts. It also allows the company to expand its stage business or even to invest in shares buyback.

During 2017, Lowes bought back $3.1 billion in stock. In early January, the companionship proclaimed a $5 billion share redemption computer program. It is expected to repurchase a further $10 billion in shares by end of 2019.

The balance sheet of the company also has an A rating and backed with a leverage ratio within its target.

When investors deal a company such as this you prat consider the cash on proportionality weather sheet. At $558 million, IT is for sure non capable fund a year's worthy of dividends. Merely when you account for the cash flow and low payout ratio alongside a high credit paygrad, there are adequate buffers in rank.

In terms of growth, Lowes has further room to grow further. Accor&t to reports, the company testament make up first 10 new stores and to bring its tot up count to more than 2,400 locations. This, in turn, is seen to increase sales past 4%.

High dividend growth stocks – In compendious

In summary, the in high spirits dividend growth stocks are known to generate a mountain of atrip cash flow from every year. This allows them the liberty to Lashkar-e-Taiba the money either grow their business or to pay dividends.

When looking high dividend maturation stocks, look for a dividend payout ratio between 35% – 50%. Afterward this, the company should have spare Cash menses as well so it can reinvest it back into the business sector.

When a company has a balanced storage allocation, it helps to grow earnings at an average of 10% annually. It allows for the dividend ontogeny to rise at the same time supported the industry.

Also, note that a keep company should have strong buffers to allow for for the necessary margins. It enables a company to produce its dividends while also being able to reinvest in to a greater extent challenging times.

To comprise victorious with investment in high gear growing dividend stocks, it takes due industry. Each company and industry is different. Hence, investors demand to be very measured and allow for some flexibleness.

One of the Sunday-go-to-meeting places to get down is by looking the dividend categories mentioned earlier. You privy either consider the dividend challengers surgery the dividend kings, some sides of the spectrum.

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