As a dividend growth investor, I highly value consistent earnings growth.
Consistent earnings growth gives a company options to grow the business, pay off debts, buy back shares, or pay dividends. Of course, I'm primarily interested in dividends, so I look for consistent dividend growth in addition to consistent earnings growth.
I consider dividend growth stocks to be stocks with increasing dividend payouts in each of the past five years. Dividend Radar tracks such stocks every week and publishes a comprehensive spreadsheet, downloadable for free, every Friday.
This article presents seven dividend growth stocks with remarkably consistent earnings growth over the past ten years.
For this article, I consider earnings growth to be consistent if a graph of the earnings over the past ten years increases monotonically. Here, monotonically increasing means that not a single year’s earnings are lower than the prior year’s earnings.
Portfolio Insight provides a powerful screener that allows users to create watch lists based on different fundamental metrics. But it doesn’t offer a screen that directly checks for monotonically increasing earnings.
Instead, I used the Non-GAAP EPS CAGR screen, requiring growth rates of at least 10% over each of the 1, 3, 5, and 10-year trailing periods. The screen produced no fewer than 82 candidates, but not all of them have monotonically increasing earnings. The reason is a decrease in one or more years can be “smoothed over” by the CAGR calculations.
Next, I used the Dividend CAGR screen to reduce the number of candidates, requiring 10% growth rates over the 1, 3, 5, and 10-year trailing periods. Only 19 of the 82 candidates passed the combined screens:
The table highlights tickers I own in my DivGro portfolio.
Finally, I inspected graphs of the earnings of the 19 remaining candidates and rejected stocks with any reduction in year-over-year earnings over the past ten years. For example, below is the Allstate (ALL) graph, which shows reduced earnings in FY 2014, FY 2015, and FY 2016.
Here are the tickers that passed my visual inspection:
Key Metrics and Fair Value Estimates
Below, I present a table with key metrics of interest to dividend growth investors. The table includes a quality score according to DVK Quality Snapshots and the five quality indicators that make up that score.
I also provide fair value estimates and show the discount (Disc.) or premium (Prem.) of a recent price to my fair value estimate.
Let's look at each of these stocks in turn.
UnitedHealth Group Incorporated (UNH)
Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core clinical expertise, advanced technology, and data and health information. The company provides medical benefits to customers in the United States and more than 125 other countries.
Market Cap: 389.80 B
Sector: Health Care
Yield (TTM Q1 2021): 1.35%
5Y Average Yield: 1.50%
Annualized Dividend: $5.00
Basic EPS: 17.81
Basic Payout Ratio: 28%
T. Rowe Price Group, Inc. (TROW)
Founded in 1937, TROW is a financial services holding company that provides global investment management services to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios, as well as through variable annuity life insurance plans. TROW is based in Baltimore, Maryland.
Market Cap: 42.52 B
Yield (TTM Q1 2021): 2.21%
5Y Average Yield: 2.76%
Annualized Dividend: $4.32
Basic EPS: 11.90
Basic Payout Ratio: 32%
MarketAxess Holdings Inc. (MKTX)
MKTX, together with its subsidiaries, operates an electronic trading platform that enables fixed-income market participants to trade corporate bonds and other types of fixed-income instruments, offering institutional investor and broker-dealer firms access to global liquidity. MKTX was founded in 2000 and is headquartered in New York, New York.
Market Cap: 17.42 B
Yield (TTM Q1 2021): 0.50%
5Y Average Yield: 0.62%
Annualized Dividend: $2.64
Basic EPS: 8.16
Basic Payout Ratio: 30%
Moody's Corporation (MCO)
Headquartered in New York, New York, MCO operates through two segments, Moody's Investors Service and Moody's Analytics. The Moody's Investors Service segment publishes credit ratings on various debt obligations and entities that issue such obligations. The Moody's Analytics segment develops products and services that support financial analysis and risk management activities. MCO was founded in 1900.
Market Cap: 62.33 B
Yield (TTM Q1 2021): 0.78%
5Y Average Yield: 1.02%
Annualized Dividend: $2.48
Basic EPS: 10.80
Basic Payout Ratio: 21%
D.R. Horton, Inc. (DHI)
DHI operates as a homebuilding company in the United States. The company constructs and sells single-family detached homes and attached homes such as townhomes, duplexes, and triplexes. It also originates and sells mortgages and provides title insurance policies. DHI was founded in 1978 and is based in Arlington, Texas.
Market Cap: 62.33 B
Sector: Consumer Discretionary
Yield (TTM Q1 2021): 0.85%
5Y Average Yield: 1.24%
Annualized Dividend: $0.80
Basic EPS: 8.75
Basic Payout Ratio: 9%
Tractor Supply Company (TSCO)
Founded in 1938 and headquartered in Brentwood, Tennessee, TSCO operates rural lifestyle retail stores in the United States. The company provides equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment. TSCO also provides hardware, truck, towing, tools, seasonal products, and clothing and footwear.
Market Cap: 62.33 B
Sector: Consumer Discretionary
Yield (TTM Q1 2021): 0.95%
5Y Average Yield: 1.40%
Annualized Dividend: $2.08
Basic EPS: 7.28
Basic Payout Ratio: 23%
Primerica, Inc. (PRI)
Together with its subsidiaries, PRI distributes financial products through licensed sales representatives to middle-income households in the United States and Canada. The company operates in three segments: Term Life Insurance; Investment and Savings Products; and Corporate and Other Distributed Products. PRI was founded in 1927 and is headquartered in Duluth, Georgia.
Market Cap: 6.21 B
Yield (TTM Q1 2021): 1.13%
5Y Average Yield: 1.08%
Annualized Dividend: $1.88
Basic EPS: 10.34
Basic Payout Ratio: 16%
This article presented seven dividend growth stocks with remarkably consistent earnings growth over the past ten years. I define consistent earnings growth as earnings that increase monotonically over an extended timeframe, in this case, ten years.
The included charts show a strong correlation between earnings growth and stock price growth. If these companies continue to grow their earnings at rates over 10% per year, the chances are that their stock prices will follow. And given their low or very low payout ratios, the companies have ample room to continue double-digit percentage dividend increases as well.
The stocks have performed quite well over the past five years, as shown in the following chart. An equal-weighted portfolio would have returned 184% over the past five years, versus 99% for the S&P 500 (SPY).
Furthermore, the stocks have high Piotroski scores, indicating the overall strong financial positions of these stocks.
In conclusion, here is a table showing the total returns (price appreciation and dividend payouts) of the seven stocks over the past ten years:
As mentioned earlier, I highly value consistent earnings growth. The seven dividend growth stocks highlighted here are shining examples. While some of these stocks are overvalued, and some offer anemic yields, I think they are exciting candidates for dividend growth investors looking for total return potential rather than just income.
As always, readers are advised to do their own due diligence before investing.
Thanks for reading!