Published on January 6th, 2021 by Bob Ciura
We maintain a heavy focus on quality dividend stocks. There are many was to measure the quality of a dividend stock. One way is the length of a company’s dividend history. In general, stocks that have raised their dividends for multiple years in a row have demonstrated that they are committed to rewarding investors with steadily rising dividends.
Investors are likely familiar with the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. Meanwhile, investors should also familiarize themselves with the Dividend Challengers, which have raised their dividends for at least 5 years in a row.
While 5 years is not the longest history of dividend growth, it does demonstrate a history of returning cash to shareholders with dividends. It also represents a company with a profitable business model, durable competitive advantages, and a positive growth outlook.
With this in mind, we created a downloadable list of over 300 Dividend Challengers. You can download your free copy of the Dividend Challengers 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 Challengers, 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 Challengers
- Example Of A High-Quality Dividend Challenger: Apple Inc. (AAPL)
- Final Thoughts
Overview of Dividend Challengers
The requirement to become a Dividend Challenger is simple: 5-9 consecutive years of dividend growth. This is not exactly a high hurdle to clear, but it does separate dividend growth stocks from the companies that have held their dividends steady for many years. This is a subtle, but important, difference.
Companies that do not raise their dividends each year are often unable to do so because the underlying business is struggling. While there are no proven precursors to a dividend cut, one potential red flag is when a stock freezes its dividend, particularly if that stock had previously held a long track record of hiking its dividend payout each year.
When business conditions deteriorate, companies often see their revenue and earnings-per-share decline. This could happen for a number of reasons, including a recession, escalating competition, or perhaps an unexpected event such as a geopolitical conflict or natural disaster. In any event, a company with falling revenue and earnings-per-share will likely not be able to raise its dividend.
Depending on how things go from there, the company in question might be able to return to dividend growth if its fundamentals improve. On the other hand, if conditions worsen, the next step could be a dividend cut or suspension. The dividend freeze was the first step in this process, which is why investors should pay attention if a dividend growth stock goes longer than a year without raising its payout.
Example Of A High-Quality Dividend Challenger: Apple Inc. (AAPL)
Apple, Inc. is the largest company in the world, with a market capitalization above $2.2 trillion which makes it a mega-cap stock.
Apple operates in the technology sector. It designs, manufactures, and sells products such as smartphones, personal computers and portable digital music players. A few of its core brands include iPhone, iPad, and Mac. Apple also has a thriving services business that sells music, apps, and subscriptions.
The company is firing on all cylinders, even in a difficult economic environment due to the coronavirus pandemic. On October 29th, Apple reported operating results for its fourth fiscal quarter and full fiscal year 2020. For the quarter, Apple generated revenue of $64.7 billion, representing a 1.0% increase compared to Q4 2019.
Product sales were down 2.7% for the quarter, as gains in Mac, iPad and Wearables were more than offset by a 20.7% decline in iPhone sales, which made up about 41% of total sales. Service sales increased 16.3% and made up 22% of all sales in the quarter. Earnings-per-share equaled $0.73 for the quarter, a small decline versus $0.76 per share in the year-ago quarter.
Still, Apple had another strong year of growth. For the year, Apple generated revenue of $274.5 billion, representing a 5.5% increase compared to fiscal year 2019.
Product sales were up 3.2% for the year, as gains in Mac, iPad and Wearables offset by a 3.2% decline in iPhone sales, which fell from 55% of total sales in 2019 to 50% in 2020. Service sales increased 16.2% year-over-year and went from 18% of total sales in 2019 to 20% in 2020. Earnings-per-share equaled $3.28 for the full year, compared to $2.97 in 2019, a 10.4% increase due to a much lower share count.
Apple resumed paying dividends in 2012 after a lengthy pause. At that time, it initiated a quarterly dividend at a split-adjusted rate of $0.09 per share (Apple has conducted two stock splits since 2012, a 7-for-1 split in 2014 and a 2-for-1 split in 2020).
The company has raised its dividend each year since 2012. Its most recent hike was a 6.5% increase declared in April 2020. Since the company resumed paying its dividend in 2012, it has increased its dividend at a compound annual growth rate of approximately 10% per year.
Apple currently has a relatively low dividend yield of 0.6%. This might be unappealing for income investors, as Apple’s current yield is significantly below the S&P 500 average yield of 1.6%. But Apple makes up for this with a high dividend growth rate. Over time, shareholders will see their dividend income rise at a significant rate, more than making up for the low current yield.
The various lists of stocks by length of dividend history are a good resource for investors who focus on high-quality dividend stocks. In order for a company to raise its dividend for at least 5 years, it must have durable competitive advantages, the ability to generate consistent profits even during recessions, and shareholder-friendly management team that is dedicated to returning cash to investors. They also have long-term growth potential and the ability to raise their dividends in the future.
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 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.