Not All Dividend Stocks Are Created Equal

by Lawrence Meyers | December 6, 2011 9:46 am

You have to be careful with dividend-paying stocks. Sometimes the yield is so high that one wonders if the dividend is sustainable. Other times, the dividend might look just fine, but if it’s a relatively new payout, then it might not be sustainable either. That’s why you always want to check to see if your stock of choice has not only been steadily paying dividends, but that the company has been increasing it over the years.

If the company is, it means it has been so efficient in deploying its capital that free cash flow has been rising, so it can afford to return increasing dividends to shareholders. Here are four such stocks that make a habit of increasing dividends:

Automatic Data Processing (NASDAQ:ADP[1]) might be the granddaddy of all boring dividend stocks. It handles administration and payroll services. I’m falling asleep just writing about it. Nevertheless, the company has been around since 1949, and despite some difficult times the past two years, ADP’s free cash flow remains robust. During the past 11 years, its dividend has gone from 8.75 cents per share to 39.5 cents. That’s a 340% rise, or about 30% annually. In the past two years, ADP has gone from 33 cents to 39, up about 20%. That 39.5 cents, by the way, is its latest lift, up from 36 cents. ADP’s yield is 3.1%.

You won’t be surprised to hear that Johnson & Johnson (NYSE:JNJ[2]) fits this category as well. The benefit of being a 115-year-old company with gazillions of products means generating well more than $11 billion annually in free cash flow. Since 2002, JNJ’s dividend has soared from 20.5 cents per share to 57 cents. I bet you are surprised to find that this is only a 185% increase over nine years, or about 20% annually, compared to ADP. That’s because JNJ constantly has to ram a lot of cash back into its pharmaceutical R&D program. Nevertheless, the dividend is up about 15% during the past two years with no end in sight. JNJ’s yield is 3.6%.

Ever hear of Leggett & Platt (NYSE:LEG[3])? I had … but only vaguely, which is odd considering it’s 118 years old. It’s almost as boring as ADP — operating in engineered components. These are things like innersprings, wire forms, furniture components, seat suspensions, commercial fixtures and tons of other products. During the past 11 years, Leggett’s dividend has risen from 11 cents per share to 28 cents, a 155% increase. The past two years has been more modest, with a total increase of only 8%, but that’s still impressive. Free cash flow remains solid here as well, and growth investors may like the 15% annualized projected earnings increase during the next five years. LEG’s yield is a generous 5%.

Cincinnati Financial Corporation (NASDAQ:CINF[4]) is a $4.75 billion insurance company with a 60-year operating history. Insurance can be a fantastic business if underwriting is handled properly. It creates enormous cash flow, as Warren Buffett can attest. With its 5.6% yield, Cincinnati Financial is an attractive business on the dividend alone. The dividend has doubled during the past 10 years, reflecting management’s tenacious but conservative approach to rewarding shareholders. In the past two years, CINF has only inched that dividend up, but the company is doing just fine.

So keep an eye out for these dividend stocks. Don’t get enamored of a new payer on the block until you see just where that money is coming from, and be sure the source won’t dry up.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned stocks.

  1. ADP:
  2. JNJ:
  3. LEG:
  4. CINF:

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