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6 Compounding Machines for Long Term Dividend Investors

These dividend giants will grow your wealth for years to come

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One of the common misconceptions about dividend growth investing is that investors who follow the strategy are only focused on dividends. While a growing dividend over time is the ultimate goal, it is not the only factor to focus on. For example, I always look for companies which can deliver growth in earnings per share over time.

The common characteristic of companies that are able to increase earnings per share include strong brands, some sort of competitive advantages, as well as products or services which have some pricing power. Of course, it doesn’t hurt if the company is expected to benefit from a tailwind such as increased exposure to emerging market consumers, increase in number of locations, adding innovative new products to the marketplace, making strategic acquisitions, and increasing margins by focusing on cost containment and productivity.

Another common characteristic of those companies also includes consistent share buybacks as well, in an effort to take out the holdings of weak hands.

Rising earnings per share are very likely to result in dividend growth, which provides the inflation protection to your passive portfolio income. Because dividends are always positive, and do not fluctuate too much, they are an ideal source of income for retired investors.

As a passive investor, my goal is to essentially purchase a stake in a quality business, and sit back while they quietly compound my capital. It is paramount to purchase these companies at attractive valuations, and avoid overpaying for future growth. In general, I am not going to pay over 20 times earnings ever for the best dividend companies such as Coca-Cola for example. I try to have some margin of safety, in the event that future is much different than the past.

For the purposes of this exercise, I have outlined a few compounders which I believe are attractively priced today, and will grow your wealth for several decades.

Coca-Cola (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend king has rewarded shareholders with a dividend increase for 51 years in a row. Over the past decade, earnings per share have increased by 12.30% per year, while dividends were raised by 9.80% per year.

Currently, the stock is trading at 20.40 times earnings and yields a very sustainable 2.90%. Based on forward earnings of $2.09 per share for 2013, the stock is fairly valued below $41.80 per share. Check my analysis of Coca-Cola for more information.

Philip Morris  (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This dividend machine has rewarded shareholders with a dividend increase since being spun-offs from Altria Group (MO) in 2008.

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