10 New Dividend Growth Stocks Worth Watching

After recently looking over the the list of 50 Dividend Aristocrats. I decided to look over all companies that have raised their dividends for 17 or more years in search for companies that I’m not already watching that would make good dividend growth stocks. Companies that I would be willing to purchase at the right price, and would be good to track on the watchlist. Just because a company raises its dividend for 25 consecutive years does not make it a good dividend growth stock worth owning, or even watching.

The problem with many of these dividend raisers is that they don’t meet both of the basic critical requirements of current income (initial dividend yield) and growth of income (dividend growth rate), in many cases they have one but not the other. Take AT&T (T) for example, a great old stodgy telecom cash cow. It typically has a high dividend yield making it a favorite among income investors. Currently AT&T has a 5.04% dividend yield, but the history of its dividend growth rate is too low: 1-yr 2.2%, 3-yr 2.2%, 5-yr 2.3%, and 10-yr 3.8%. You get the picture. Those dividend growth rates don’t look like they will even keep up with the 3.1% historic rate of inflation. We need to beat the inflation rate in retirement and grow our income faster while building our income portfolio. I like to a strong history of at least a 5% dividend growth rate. As for initial dividend yield when I purchase a dividend growth stock I like to get at least a 2.5% yield. If you have used the Watchlist you may have noticed that I list stocks with yields far below 2.5%. I do this because of the nature of yields which move up when a stock price cycles down.

An example of a fairly popular dividend growth stock with a monster dividend growth history, but with an anemic dividend yield is Cintas Corp (CTAS). The dividend growth history for Cintas is: 1-yr 23.5%, 3-yr 17.9%, 5-yr 16.9%, and 10-yr 12.6%, but by only paying $1.05 per share annual dividend payment and trading near $90 Cintas only has a 1.17% dividend yield, even if Cintas traded back at its 52-week low of $78 it would only provide a 1.35% yield. At this low initial yield even with its great dividend growth rate of 16.9% (I’ll use the 5-year average) Cintas stock would take nearly 20 years to reach a 10% yield-on-cost. A good target that I like to use is a minimum of a 10% yield-on-cost in 10 years, (see 10 by 10 chart here) the shorter the time period the better.

Needless to say both dividend yield and the dividend growth rate are critical factors that need to be high enough to build your income machine now, and when you live off of your income in the future. Many stocks have one or the other, but not both.

The good news is that after searching through some 200 companies with 17 or more years of consecutive dividend increases I was able to find 10 more that met both dividend yield and growth requirements, and with the exception of one (SBSI) had at least a narrow economic moat.

Here are some stats on the 10 additions that are worth watching and have recently been added to the watchlist:

Personally I’m closely watching PII and HCP for pull backs to initiate positions in.

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