Investing in companies that pay reliable dividends can add a level of stability and predictability to a portfolio. It’s a known fact that dividend-paying companies tend to hold up better than non-dividend payers during bear markets. In addition, investing in companies with a combination of exceptional earnings and dividend growth can provide very attractive, market-beating returns over the long term.
Dividend achievers
In order for a company to pay a dividend, and increase it every year during both good times and bad times, it must operate very efficiently, have superior management, and have a sustainable and successful business model that results in consistent earnings growth.
A resource for developing a watch list of companies with outstanding dividend histories is the dividend achievers index. In order to make it into the dividend achievers index, a company must have increased its annual dividend for a minimum of ten consecutive years, which is a significant accomplishment, considering the dismal economic conditions that companies have been faced with over the last decade.
I believe that a portion of a properly diversified portfolio should be dedicated to companies with outstanding dividend payment histories, such as those in the dividend achievers index.
Investors who prefer to invest in the entire index, instead of choosing individual constituents, can do so by opening a position in the PowerShares Dividend Achievers Index. This ETF’s holdings include all of the companies (approximately 150) that are included within the index. This is a safe and easy way to invest in a basket of companies with growing dividends, but I personally prefer to invest in the “best of the best” by choosing the most attractive opportunities within the index.
Two dividend achievers for the long haul
C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) is a third party logistics company that provides global freight transportation logistics and supply chain solutions for a wide variety of industries.
Imagine that you are a provider of a very large, heavy product in the U.S., and that this product is needed quickly in a country that you have never heard of. How will you get this product to the customer on time? Fortunately, you could utilize C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW)’s services. C.H. Robinson has the ability to determine the quickest and most cost-effective means to get this product to its destination.
C.H. Robinson’s transportation methods include road, air, ocean, and train. C.H. Robinson provides its services for over 42,000 customers and has access to over 56,000 transportation providers.
C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) is heavily involved in the fresh produce industry, which includes vegetables and fruit in addition to a wide variety of other food and beverage products. Its expertise in delivering fresh, high-quality produce is invaluable. Refrigerated transportation methods are utilized to ensure that the products being shipped are within the proper temperature range.
The global population is constantly growing, developing markets are continuing to advance, and the economy is slowly improving. As a result, international trade should increase significantly, which bodes well for C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW).
Caterpillar Inc. (NYSE:CAT) is a global blue-chip company that manufactures and sells construction equipment, mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.
Through its FG Wilson, MaK, MWM, Olympian, Perkins, Solar, and Turbomach subsidiaries, Caterpillar provides a wide range of engine and power generation equipment, ranging from small diesel backup generator sets, to natural gas compressors, to industrial turbines.
A struggling global economy caused earnings to decline significantly during the latest quarterly earnings report, but Caterpillar Inc. (NYSE:CAT) should rebound strongly as the global economy improves.
The rest of the story
C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) and Caterpillar are in different industries, and their business activities are as different as night and day. However, they share common ground by both having impressive earnings growth and excellent dividend histories.
The following chart illustrates several important metrics:
| 2012 revenues | 10 yr share price growth | 10 yr revenue growth | 10 year earnings growth | 10 yr dividend growth | Dividend Yield | Current P/E | Payout ratio | |
| CAT | $65.9 billion | 238% | 190% | 420% | 200% | 2.4% | 11.9 | 21% |
| CHRW | $11.4 billion | 224% | 240% | 490% | 775% | 2.4% | 15.9 | 28% |
The dividend yield exactly ten years ago would have been 3.4% for Caterpillar Inc. (NYSE:CAT) and 1% for C.H. Robinson. However, if you would have purchased shares in both of these companies ten years ago and held them until today, your effective yield would be 10% for Caterpillar and 9% for C.H. Robinson. The effective yield is the percentage of your initial stock purchase amount that you will receive in the future, after dividend increases have been applied. Both Caterpillar and C.H. Robinson have low payout ratios, meaning that their impressive dividend increases should continue.
As you can see in the chart, Caterpillar Inc. (NYSE:CAT) and C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) had exceptional revenue and earnings growth over the last decade. Caterpillar and C.H. Robinson are much larger companies than they were a decade ago, therefore it will be tougher to maintain the level of growth that they have experienced over the last decade. However, I believe that they will still achieve above-average growth rates as the global economy continues to recover. In addition, they both have relatively low P/E’s, and I believe that now is a good time to consider opening or adding to a position in these companies.
The Foolish bottom line
An investor can achieve very rewarding returns over the long-term by investing in a select group of companies that are constituents of the dividend achiever index, particularly when reinvesting the dividends. Dividend reinvestment, combined with capital gains, can unleash an amazing compounding machine, creating an impressive snowball effect over the long-term. Dividend achievers, such as Caterpillar and C.H. Robinson, can allow you to experience this amazing effect.
The article Dividend Achievers For The Long Haul: Part 1 originally appeared on Fool.com and is written by Greg Williamson.
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