Dividends can be a great source of cash flows for investors. Whether in retirement and living off of dividends or growing a portfolio and reinvesting the cashflows in other investments, the compounding of returns from these tax advantaged funds can be powerful. What any single investor looks for in a dividend company may difer but we wanted to highlight some attributes we like to look for in dividend names. Highlighted below are companies that have aggressively grown dividends by a 10-yr annualized dividend growth rate > 10%. To evaluate dividend sustainability and the potential for continued growth, results were further filtered with a payout ratio < 75% and leverage < 50%. 

The payout ratio may be the single most important statistic in evaluating a dividend's safety. Lower payout ratios are generally safer than higher payout ratios but an increased ratio of course brings a better yield. Instead of focusing on the most conservative payout ratio, look for a balanced number that represents a fair yield today but also leaves room for growth down the road. While each sector is different, a payout in the 50% - 70% range could be considered balanced.  Many of our readers will be aware that we prefer to use cash flow rather than earnings when evaluating the payout, as dividends are actually paid from cash and not earnings.

Common stock shareholders collecting dividends sit on the bottom rung of a company's ladder of financial obligations. It is important to consider leverage as represented by a lower debt/equity (D/E) ratio. In times of stress, earnings and cash flow are of course put under pressure, most notably for highly leveraged companies. The dividend investor should make sure that the ‘VIP line’ of bond and preferred shareholders is not too long. 

Some readers may be surprised that all results have a yield of 3% or less (except TCL.A). Quality companies that demonstrate the above characteristics often trade at a premium price, as is seen by the P/E. This has a habit of driving down the yield, as investors reward a consistent and high-growth dividend. Indeed, a growing dividend is where the true reward lies in our view compared to high yielders that often pay a dividend at the expense of future growth (reinvestment in the business) and have very little room for the dividend to weather any downturn in demand or economic activity. 

We also note the absence of the telecommunication, utility and “Big Bank” stocks. This outcome reflects the required 10-yr dividend CAGR above 10%. While these stocks do have a good record of growing dividends, the filter threshold over a 10-year period is a high bar to clear for many companies, making this list an interesting one in our view. 

Don't forget to subscribe to the blog below for more stock news and analysis!