One of the quotes that you often hear in investing circles is that “the safest dividend is the one that has just been raised”. This is another way of saying that a business with a good dividend growth rate is likely a better and safer investment than a business with a high dividend rate that is not increased periodically.
Businesses with a good dividend growth rate over the long term are better and safer investments because the growth in the annual dividend is likely the result of growth in the profits of the company and management’s confidence in their future long-term profitability.
As a result, a business that increased its dividend on a regular basis is attractive to investors and likely to have a total return that would beat the S&P 500 index over long periods of time
We want to make sure you know how to calculate dividend growth rate and an average dividend growth rate so that you can pick out winning stocks that will maximize your investing returns.
Lockheed Martin (ticker LMT) is a large well known defense contractor known for being generous with its dividend payment to shareholders.
In 2020, LMT paid a dividend of $9.80 for each share of stock, which was an increase from $9.00 a share paid in 2019. The one-year annual growth in dividends for LMT is 8.89%. This is calculated as:
(2020 dividend – 2019 dividend) / 2019 dividend
Continuing with Lockheed Martin, here are their multi years annual dividend payments:
Using the formula above, the growth rate from 2019 to 2020 is 8.88% and the dividend growth rate from 2018 to 2019 is 9.75%. This equates to a two-year average growth in dividends of 9.32%. This is calculated as:
(Year 1 Dividend Growth Rate + Year 2 Dividend Growth Rate) / 2
Far too often when dividend investors look for stocks, they reach for the highest dividend yields without considering if the dividend is safe. Often those high yield dividend payments are not sustainable, and the stock price will drop if the dividend is reduced or suspended.
I would much rather invest in a company like Lockheed Martin that over a period of time, spanning many years, that has an attractive dividend history. For such dividend growth stocks, this includes many dividend increases supported by being able to generate profits over the same multi year period of time.
In addition to Lockheed Martin above, here is a small sample of attractive stocks with a long term history of sharing their increased profits with shareholders via annual large dividend increases:
Mastercard (ticker MA) and Visa (ticker V) – wide moat electronic payment processors
Northrop Grumman (ticker NOC) – another defense contractor with consistent dividend and profit increases
NextEra Energy (ticker NEE) – high quality utility focused on renewable energy
All of these companies have similar characteristics in that:
One of the safest dividend investing strategies is to find high quality companies who increase their dividends significantly from year to year, where it is supported by high growth in profits.
In order to find these companies, you need to understand how to calculate the dividend growth rate and average dividend growth rates as explained above.
Use the five sample companies discussed in this article to help get you started with your research.