Published on January 26th, 2021 by Bob Ciura
Income investors might be tempted to buy stocks with the highest dividend yields. But this is often a mistake, as extreme high-yielding stocks are often in dubious financial condition. While high yields are important, we believe it is equally important to focus on quality.
One way to measure the quality of a dividend stock is by its dividend history. We believe stocks with established histories of dividend growth, are more likely to continue growing their dividends moving forward. This is why we focus on groups of stocks with long histories of increasing their dividends, such as the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases.
Meanwhile, investors might also want to look over the list of Dividend Contenders, which have raised their dividends for at least 10 years in a row.
While 10 years is not as long as the Dividend Aristocrats, it does demonstrate a company’s proven ability and willingness to return cash to shareholders. Often, it also means a company possesses a business model that produces steady profits consistently, even during recessions.
With this in mind, we created a downloadable list of 300+ Dividend Contenders. You can download your free copy of the Dividend Contenders list, along with relevant financial metrics like price-to-earnings ratios, dividend yields, and payout ratios, by clicking on the link below:
This article will discuss an overview of Dividend Contenders, and why investors should consider quality dividend growth stocks. Additional information regarding dividend stocks in our coverage universe can be found in the Sure Analysis Research Database.
Table of Contents
You can instantly jump to any specific section of the article by clicking on the links below:
- Overview of Dividend Contenders
- Example Of A High-Quality Dividend Contender: Texas Instruments (TXN)
- Final Thoughts
Overview of Dividend Contenders
The requirement to become a Dividend Contender is fairly straightforward: at least 10 consecutive years of dividend growth. While 10 years may not seem like longest track record, and indeed there are stocks with much longer streaks of annual dividend hikes, it is nevertheless a positive indicator. After all, there are a number of companies that have never paid a dividend. Or, even among companies that do pay dividends, many have not been able to raise their dividends consistently due to a lack of underlying business growth.
Many companies cannot pay dividends, or raise dividend payouts from year to year, because their business models do not generate enough profits or cash flow. Cyclical companies also have trouble joining lists of long-running dividend growth stocks, because their profits collapse during recessions. Automakers and oil stocks are good examples of highly cyclical companies that will often freeze or cut their dividends during recessions.
In recessions, corporate profits typically decline, particularly within industries that are closely tied to consumer spending. The past year has seen companies across multiple industries suspend or eliminate their dividend payouts due to the spread of the coronavirus pandemic, and its impact on the global economy.
That said, there were many companies that maintained their dividends over the past year, and even continued to raise them, despite the pandemic. The highest-quality dividend growth stocks that continued to increase their dividends in 2020, once again proved the staying power and durable competitive advantages of their business models. This is why income investors looking for safe dividends and reliable dividend growth, should focus on companies with established histories of successfully growing their dividends, even during recessions.
Example Of A High-Quality Dividend Contender: Texas Instruments (TXN)
Texas Instruments is a Dividend Contender, and a prime example of a high-quality dividend growth stock that has rewarded investors over the years. Texas Instruments is a semiconductor company that operates two business units: Analog and Embedded Processing. Its products include semiconductors that measure sound, temperature and other physical data and convert them to digital signals, as well as semiconductors that are designed to handle specific tasks and applications.
Texas Instruments has a very shareholder-friendly management team, that has returned excess cash to shareholders for many years. For example, from 2004-2019 the company raised its dividend by 27% compounded annually.
Source: Investor Presentation
The company has a strong business model with durable competitive advantages, which is why it continued to perform well in 2020, even within a very difficult operating climate. In the 2020 third quarter, revenue of $3.8 billion increased 18% quarter-over-quarter, and 1% year-over-year. This was the result of a revenue increase of 7% in the Analog business, while revenues in the Processing segment declined by 10% year-over-year. Texas Instruments managed to keep its gross profit margin at an attractive level of 64%.
Texas Instruments generated earnings-per-share of $1.45 during the third quarter, down 3% year-over-year, but exceeded consensus estimates by $0.17 per share. The company generated trailing 12-month free cash flow of $5.2 billion. Steady profitability and strong free cash flow allowed Texas Instruments to continue rewarding shareholders with excellent cash returns, even during the pandemic.
Thanks to its strong cash generation, Texas Instruments returned $6.4 billion during the trailing 12-month period, approximately 64% of which was in the form of dividends. The company raised its dividend by 13% in September 2020, marking the 17th consecutive year of dividend increases for Texas Instruments. It has also returned lots of cash in the form of share repurchases, having reduced its outstanding shares by 47% since the end of 2004.
Texas Instruments currently has a dividend yield of 2.4%. This is not the highest yield around, but it still beats the average yield of the S&P 500 Index, currently at just 1.5%. Plus, Texas Instruments stock offers a very high level of dividend safety and dividend growth, which are equally important considerations for income investors.
Investors on the hunt for stocks with a high likelihood of increasing their dividends each year reliably, should focus on stocks with the longest histories of dividend growth. For a company to raise its dividend for at least 10 years, it must have durable competitive advantages, steady profitability even during times of economic downturns, and a positive future growth outlook. This will provide them with the ability to raise their dividends going forward.
If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The Dividend Aristocrats List: a group of elite S&P 500 stocks with 25+ years of consecutive dividend increases.
- The Dividend Champions List: a group of stocks with 25+ years of consecutive dividend increases, but do not qualify as Dividend Aristocrats.
- The Dividend Challengers List: stocks with 5+ years of consecutive dividend increases.
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List: considered to be the best-of-the-best among dividend growth stocks, the Dividend Kings are a group of exceptional dividend stocks with 50+ years of consecutive dividend increases.
- The Blue Chip Stocks List: contains stocks on either the Dividend Achievers, Dividend Aristocrats, or Dividend Kings list.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.