Top Ten Dividend Growth Stocks

Top Ten Dividend Growth Stocks

Top Ten Dividend Growth Stocks by Mike McNeil, The Dividend Guy Blog, via Sure Dividend

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My name is Mike McNeil and I’m the author of The Dividend Guy Blog along with the owner and portfolio manager over at Dividend Stocks Rock. I earned my bachelor degree in finance-marketing, own a CFP title along with an MBA in financial services. Besides being a passionate investor, I’m also happily married with three beautiful children. I started my online venture to educate people about investing and to be able to spend more time with my family.

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I used to struggle with the same issues millions of small investors deal with on a daily basis. Which stocks to buy? When to sell them? How to find the time to manage my portfolio? How to diversify? I wasn’t into dividend investing until I looked in depth at my portfolio returns and realized I was having difficulty keeping up with the market.

The root of the problem was a very poorly built portfolio that lacked structure and the components required to build a sturdy base. I made good money from the stock market but I was taking unnecessary risk to achieve my investing goals.

From that point on, I was determined to create a portfolio strategy that would allow me to benefit from dividend growth stocks as a solid foundation. Since then, I manage my portfolio with a stress free method that enables me to cash out dividend payments even when the market goes sour.

The purpose of this guide is to create a list of 10 very strong dividend growth stocks that I can buy and sleep on. I didn’t want to make an exhaustive list as there are several great companies to buy. I didn’t want to make a classic list either, this is why I tried to avoid classics such as Coca-Cola (KO) in this list… but I couldn’t help including Johnson & Johnson (JNJ) hahaha!

3M Co (MMM)

What Makes MMM a Good Business

The strongest reason why you should add MMM to your portfolio is related to its incredible ability to generate cash flow on a constant basis. Most 3M products are consumable and generate repeat purchases. MMM makes sure to keep its competitors behind it by spending over 2 billion in R&D annually while using another 2 billion for acquisitions each year. However, 3M Co doesn’t forget about its shareholders either. MMM has a strong history of dividend growth and stock repurchases. The business evolves in 5 different segments:

Industrial Business (34%): This is the largest segment in terms of sales. The division provides adhesives, abrasives, filtration systems, fasteners and specialty materials to a variety of industries.
Safety and Graphics (18%): This business offers films, reflective materials, projection systems, and the like. I bet you didn't know much about this part of 3M Co, right?

Electronics and Energy (17%): This is 3M’s biggest business operation in Asia with two-thirds of its revenue coming from this region. Electronics and Energy provides products for businesses including films for LCD screens and splicing products for signal cables.

Healthcare (17%): The Healthcare business focuses on products offered to more developed countries such as the US and Europe. It makes products in the areas of wound care, oral care, drug delivery systems, etc.

Consumer and Office (14%): This is probably the division we know best as consumers; 3M offers a variety of home office products in developed countries. Over half of these segment revenues come from the US.

Dividend Growth Perspective

The company has posted a double digit annual dividend growth rate over the past 5 years (10.89%). Since both revenues and earnings continue to increase even considering currency headwinds, dividend investors should expect more dividend increases in the upcoming years.

MMM was able to keep a payout ratio under 50% during the past 5 years leading us to think that future dividend increase is sustainable even if the company faces a global economic slowdown in the next couple of years.

Stock Valuation

In my opinion, MMM should be part of most conservative (or core) dividend portfolios. While you shouldn’t expect incredible growth from this company, dividend payment increases will always be there each year. In order to verify if it’s the right time to buy MMM, we will look at the company’s 10 year PE history along with a Dividend Discount Model calculation.

Dividend Growth Stocks

As you can see, the strong dividend increase in the past 5 years hasn’t been ignored by the market. The P/E ratio has continuously increased over the past 3 years. However, the current market slump generated a buying opportunity as the PE ratio dropped from 23 to under 19.

It seems the company hasn’t been highly valued as right now. Let’s use the dividend discount model to see how much the company is worth according to its dividend payment ability.

Dividend Growth Stocks

Source: Dividend Toolkit

I’ve used a dividend growth rate of 10% for the first 10 years and reduced it to 7.5% afterward. Then, I used a discount rate of 9% since the company shows stellar numbers.

According to the DDM, the company trades at a discount over 20% or so with a fair value of $179.

Considering MMM’s product portfolio and the fact the company is making the bulk of its sales from consumable products in a business-to-business model, MMM seems fairly attractive at the current price. This is a “long-term-dividend-growth” stock for patient investors.

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