I have built my portfolio of dividend growth stocks over the past 8 – 9 years, by following a disciplined approach to investing. Having an objective approach has helped me immensely in staying the course, and not panicking and selling out when things looked difficult. As a general rule, dividend growth investors buy stocks to hold for years. Success is the result of an enterprise that is purchased at an attractive valuation, which then manages to grow earnings and dividends over time. This allows the investor to compound wealth and income, and ignore short term price fluctuations. The only exception to avoiding the moody Mr Market is when it offers quality companies at a discount. Getting paid to hold on to stocks has been helpful. Seeing the companies I own thrive, and boosting their dividends is helpful as well.

Photo by alf.melin
Photo by alf.melin

My process included a few simple steps, such as:

1) Saving as much as possible ( in fact I am close to saving my entire after-tax paycheck this year)

2) Focusing only on companies with a track record of annual dividend increases ( dividend aristocrats, dividend champions, dividend achievers)

3) Narrowing my list further by focusing on companies with:
a) P/E below 20
b) Dividend Payout Ratios below 60% ( though different for REITs and MLPs)
c) Minimum dividend yields (since relaxed to above 1%)

4) Then reviewing trends in fundamentals for each candidate
a) Earnings per share that grow over the past decade
b) Dividend Payout Ratios that do not exceed 60%
c) Dividends Per Share that grow above 3%/year
d) Returns on Equity

5) After that, the goal was to buy and hold, without doing much. Trading too often usually leads to costly mistakes for the investor. Plus, it increases your investment costs as well.

I ran those criteria against the list of dividend champions on Friday, November 11. I eliminated companies that had not shown growth in earnings per share over the past decade, since those are unlikely to continue their streak of dividend increases over the next decade.

SYMBOL Name P/E Dividend Yield Dividend Per share Earnings Per Share Dividend Payout Rato Stock Price 10 year Dividend Growth
AFL AFLAC Inc.   11.51 2.37%  $       1.72  $       6.31 27%  $  72.61 14%
BEN Franklin Resources   12.66 1.93%  $       0.72  $       2.94 24%  $  37.22 16%
BMS Bemis Company   19.86 2.41%  $       1.16  $       2.42 48%  $  48.05 5%
CBSH Commerce Bancshares   20.82 1.63% $       0.90  $       2.66 34%  $  55.38 5%
CPKF Chesapeake Financial Shares   13.19 2.37%  $       0.50  $       1.60 31%  $  21.10 8%
CSVI Computer Services Inc.   19.08 2.85%  $       1.12  $       2.06 54%  $  39.30 16%
EV Eaton Vance Corp.   18.39 2.93%  $       1.12  $       2.08 54%  $  38.25 12%
GD General Dynamics   18.05 1.80%  $       3.04  $       9.34 33%  $168.55 13%
GPC Genuine Parts Co.   20.44 2.78%  $       2.63  $       4.63 57%  $  94.62 7%
GWW W.W. Grainger Inc.   19.57 2.15%  $       4.88  $     11.58 44%  $226.58 17%
JNJ Johnson & Johnson   20.78 2.70%  $       3.20  $       5.70 56%  $118.47 9%
LEG Leggett & Platt Inc.   18.78 2.84%  $       1.36  $       2.55 53%  $  47.88 7%
RPM RPM International Inc.   18.82 2.34%  $       1.20  $       2.73 44%  $  51.39 6%
SCL Stepan Company   20.02 1.06%  $       0.82  $       3.87 21%  $  77.48 6%
SRCE 1st Source Corp.   18.39 1.80%  $       0.72  $       2.17 33%  $  39.90 5%
SWK Stanley Black & Decker   19.12 1.84%  $       2.32  $       6.58 35%  $125.78 7%
TGT Target Corp.   13.21 3.36%  $       2.40  $       5.40 44%  $  71.35 20%
TMP Tompkins Financial Corp.   20.74 2.30%  $       1.80  $       3.78 48%  $  78.40 6%
TROW T. Rowe Price Group   15.91 3.06%  $       2.16  $       4.43 49%  $  70.50 16%
UGI UGI Corp.   20.34 2.25%  $       0.95  $       2.08 46%  $  42.31 7%

This screen is not an automatic buy however. The investor needs to evaluate each company individually, and determine if the success of the past can be replicated. In addition, readers need to be aware that there are limitations to screening, due to one-time accounting events that may result in companies being included or excluded.

Full Disclosure: Long AFL, EV, GPC, GWW, JNJ, TGT, TROW