Mostly lost in all of the recent hoopla over the Apple (AAPL) – Federal Bureau of Investigation iPhone encryption debate was a promise originally made in 2014 and reiterated by CEO Tim Cook at the company’s recent shareholder’s meeting. AAPL stock will increase its dividend every year. Take it to the bank. Count on it.
This was music to the ears for those investors practicing what is commonly referred to as dividend growth investing, or DGI. It is especially good news for retirees purchasing dividend stocks to obtain a growing stream of income that meets or exceeds inflation during their golden years.
As a first step oftentimes investors in dividend stocks scan lists for companies that have boosted the quarterly payout annually for many decades. For example, the Dividend Aristocrats and Dividend Kings contain stocks that have increased dividends annually for 25 and 50 straight years, respectively.
Some, like AAPL stock, haven’t paid or increased the dividend for quite as long, so it might take a bit of extra work to find them.
One way to identify some of the best dividend stocks of tomorrow is to screen for certain characteristics, such as reasonable valuation, consistent earnings growth, modest payout ratio, competitive dividend yield, manageable debt levels, and intangibles such as the lack of any recent “bad” news. You still may want to keep dividend history, say three to 24 consecutive years of increases, in the mix.
After running the screen (I used FINVIZ) with the metrics listed below, in addition to AAPL, several other potential long-term dividend growth dynamos, including BlackRock (BLK) and Robert Half International (RHI), popped up:
- Trailing and forward P/E < overall market (SP500) and historical performance for the company
- Average EPS growth > 10% per year over the last half decade (and by analyst consensus projected to be positive going forward)
- Payout ratio < 60%
- Dividend yield > 10-year Treasury note yield (~1.8%)
- Long term debt/equity < 1.0
AAPL: The Apple of Your Eye
The dividend on Apple stock was reinstituted in 2012 after a bit of a lag so it won’t show up on many long-term growth lists. However, AAPL stock meets most of the criteria laid out above and is likely to be a powerhouse for many years to come. That’s notwithstanding analyst and investor concern about the future of the iPhone, unquestionably Apple’s most important product comprising two-thirds of overall revenue and the bulk of the profit.
The negativity surrounding AAPL needs to be balanced by the positives: Two new iPhone models are due out this year intended to address the 60% of the installed base who have not upgraded their handsets yet. Last fiscal year, Apple reported $78 billion in revenue from products and services other than the iPhone and $70 billion in free cash flow, while it boasts over $200 billion in cash.
This Dividend Is Back in the Black(Rock)
The asset management titan, BlackRock, based in New York City, was founded in 1988 and began paying a dividend in 2003, which has grown at about a 17% annual rate since 2009. Like many firms tied to the financial industry the company was affected by the 2008-2009 crash. BLK was forced to freeze the payout at $0.78 for eight quarters. However, the investment industry has since stabilized, and assets under management have grown to $4.5 trillion.
BLK is likely to keep increasing the dividend, the current yield is 2.8%, based upon its trailing P/E of 16.5, forward multiple of 14.7, past and projected double-digit EPS growth rates, payout ratio of 47%, a minuscule long term debt/equity level of 0.18, and the fact that no recent bad news seems to have cropped up.
RHI: No Debt, Great Dividend
Robert Half, the world’s largest accounting and finance staffing firm with over 400 locations, provides temporary employees for a broad spectrum of industries and corporations.
RHI appears to have all of the necessary characteristics in place for future dividend increases, which have been ongoing for a dozen years. RHI stock currently yields 2.1% and is inexpensive right now with a trailing P/E of 15 and a forward P/E of less than 13. The company has reported robust earnings growth averaging over 40% per year over the past five years (and the consensus is that double-digit growth will continue), has no debt to speak of, and sports a low payout ratio of 29%. Robert Half has a relatively wide economic moat and has just a few competitors. It is difficult to break into the industry.
Investors seeking to locate great dividend stocks with a relatively limited growth history should look at stocks such as AAPL, BLK, and RHI which based upon a few metrics such as valuation, earnings growth, dividend yield, payout ratio, and debt levels are poised for future stardom.
At the time of this writing, the author was long AAPL stock.
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