Dividend investors would be wise to focus not just on a stock’s current yield but also on the long-term growth potential of its dividends. That’s because strong businesses that consistently raise their dividend payouts reward shareholders with a steadily rising income stream that essentially equates to a raise every year. And, well, who doesn’t like a raise?
But there are other reasons to value dividend growth so highly, and they’re well supported by research. For instance, a study by C. Thomas Howard published in Advisor Perspectives found that for every percentage point a stock’s yield rises, its annual return increases by 0.22 percentage points if it’s a large cap, 0.25 if it’s a mid cap, and 0.46 if it’s a small cap. Even better, Howard found that dividend-growing stocks outperformed dividend cutters by 10 percentage points per year from 1973 to 2010 and beat both flat- and no-dividend stocks. And the icing on the cake is that Howard showed that this outperformance came with a third less volatility. Higher returns, less volatility-induced stress, and a steadily growing income stream — what’s not to love?
| Company | 1-Year Dividend Growth Rate |
|---|---|
| Seadrill Ltd (NYSE:SDRL) | 8.4% |
| Worthington Industries, Inc. (NYSE:WOR) | 8.3% |
| PVR Partners LP (NYSE:PVR) | 6.3% |
| Huntington Bancshares Incorporated (NASDAQ:HBAN) | 6.3% |
| Raymond James Financial, Inc. (NYSE:RJF) | 5.8% |
Source: S&P Capital IQ.
Seadrill is a leading offshore deepwater drilling company operating a fleet of more than 60 units that comprises drillships, jack-up rigs, semi-submersible rigs, and tender rigs for operations in shallow to ultra-deepwater areas. CAPS participants have awarded Seadrill with a top five-star rating, and the company is paying out a sizable 7.6% dividend.
Worthington Industries is a global metals manufacturing company focusing on value-added steel processing and manufactured metal products. Worthington is a leader in manufactured pressure cylinders, such as propane tanks and compressed natural gas storage cylinders; framing systems and stairs for mid-rise buildings; and steel pallets and racks. Worthington currently has a four-star ranking on CAPS and offers investors a 1.7% yield.
PVR Partners is a publicly traded limited partnership that owns and operates a network of natural gas midstream pipelines and processing plants, as well as coal and other natural resource properties. Fools have given PVR Partners a three-star rating in CAPS and its units are yielding 9.5%.
Huntington Bancshares operates as the holding company for the Huntington National Bank that provides commercial, small business, and consumer banking services via its network of approximately 700 branches located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Huntington Bancshares sports a four-star rating in CAPS and is yielding 2.3%.
Raymond James Financial is a diversified financial services holding company engaged primarily in financial planning, investment banking, and asset management, with more than 6,300 financial advisors serving approximately 2.5 million accounts and total client assets of approximately $400 billion. Raymond James Financial has a three-star CAPS rating, and offers investors a 1.3% dividend.
Joe Tenebruso manages a Real-Money Portfolio for The Motley Fool and is an analyst on the Fool’s Stock Advisor and Supernova premium service teams. You can connect with him on Twitter @Tier1Investor. Joe has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Seadrill. It also owns shares of Huntington Bancshares.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
