The Best Companies That Grow Their Dividends

I wanted to provide a list of factors to consider when searching for the best companies that grow their dividends over the long haul. I recommend placing a primary emphasis on per share earnings growth and sales growth, and also examining debt, share count dilution, and payout ratios as part of your analysi


It is not a requirement, but companies that grow their dividends over long periods of time tend to belong to non-cyclical industries that don’t experience many dips in profit.

The pharmaceutical giant Johnson & Johnson has grown its dividend annually since 1963, and has never quit its payout to shareholders at any point in its publicly traded history. What makes this possible? Earnings never collapse to force a dividend cut.

Are you ready for a crazy impressive fact about Johnson & Johnson? In the past thirty-five years, there has only been one year in which Johnson & Johnson’s year-over-year profits failed to grow. And the amount of the decline was only 2%. When profits are always on the rise—they even grew from $12.9 billion to $13.2 billion during the financial crisis—you can be certain that the Board of Directors will always have stable cash flows available to share with owners. When the global economy ebbs, the same amount of profits keep flowing in, and that is why you see Johnson & Johnson stock stuffed into an estimated 87% of trust funds that hold common stocks.

This does not mean that you should completely avoid cyclical companies from consideration when you are searching for dividend growth. But it does mean that an extra bit of caution is warranted because you have to compare the current dividend payout rate to a potential earnings collapse.

For instance, Emerson Electric is cyclical company that has grown its dividend every year for over fifty years. What is its secret? Even when earnings collapse, the dividend payment is still comfortably covered by those lowered earnings.

Between 2008 and 2009, Emerson Electric saw its earnings fall from $3.11 per share to $2.27 per share. That is not a big deal because the 2008 dividend payout rate was only $1.20. The company still had a sizable gap to grow its dividend. During the worst of 2009, Emerson Electric shareholders got to see their income rise from $1.20 per share to $1.33 per share because even the lower level of $2.27 per share in profits could adequately support a rising dividend payout ratio.

When you want to perform a stress test on a cyclical stock long-term ability to pay a dividend, you should find out the percentage change during its worst cyclical period in history. Then, look at the current spread between the dividend rate and earnings. Cut the earnings by the same percentage rate, and so if the annual dividend payout is still below it. If it is, you know that you can replicate the worst conditions that the business has ever seen and still receive a growing dividend. If the earnings would fall below the dividend, then you have successfully informed yourself that there is a risk of a dividend cut during a deep recession.

When search for companies that grow their dividends every year, look for stocks that have room to increase their dividend payout ratio.

I have been a strong advocate of Bank of America stock over the past few years, mostly because I observed the enormous gap between its dividend payout and the profits that it is bringing in. In 2015, Bank of America (BAC) stock earned $1.31 per share and paid out $0.20 per share in dividends. That was only a 15% dividend payout ratio. It was making over $15 billion per year in profits, but it was only shipping out $2 billion to shareholders as dividends.

That is well below the industry average of 40% to 60%. Even if Bank of America didn’t grow earnings, it could support a dividend payout of $7.5 billion or so. That is an increase from last year’s $0.20 rate to $0.60 per share.

When 2016 came around, Bank of America hiked the dividend and paid out $0.25 per share. It has the current capacity to pay out double the rate it is paying. And plus, interest rates are expected to rise, and that means more net interest income for lending institutions, so Bank of America’s earnings will grow and the payout ratio will increase. This means that Bank of America will be a company that grows its dividend by a double-digit rate for the next five years.

So why doesn’t everyone do it? Because it requires patience to see it through. You have to tolerate a year or two of only collecting 1% on your money. Wall Street isn’t filled with people that want to plant seeds in 2017 and wait for them to grow in 2021. But therein lies your opportunity. The patient road is the less traveled one, and has a greater payoff than most people think.

Look for high sales growth per share. Firms that deliver sustainable dividend growth have to do at least one of three things: raise the price of their products, repurchase stock, or sell more products.

There is a natural limit to the first two. Very few companies can raise the price of their product by 5% or more perpetually. And very few companies have the cash flows to repurchase more than 2% or 3% of its outstanding stock per year.

For instance, you might have noticed that McCormick has grown its dividends by 11% annually since 1992. If you were collecting $100 per year in McCormick dividends back then, you would be collecting $1,500 now per year now. And if you had reinvested, the rate of growth would have been 13% since you would have a higher share count in McCormick as well. What does that mean? Those same $100 dividends would have grown to become a $2,500 annual cash payout. And you would have earned those supremely lucrative returns by selling pepper and salt!

Before it happened, how could you have identified this?

Well, McCormick reports reliably steady results that don’t ebb and flow all that much with the business cycle. The basic formula is this: McCormick sells 6% more spices and seasonings each year, the price goes up about 2-3%, and McCormick repurchases about 1-2% of its stock each year. In a given year, those figures might be a little bit higher or lower, but that is the center of gravity for the business.

That 6% sales growth per share is one of the ways you can identify that the business is prosperous. It is not relying on financial engineering to prop up returns, but rather, uses financial engineering through repurchases to augment and turbo-charge the effects of its sales growth.

Companies that grow their dividends grow their earnings, and companies that grow their earnings sell more stuff each year, and the best measure is to look at ten-year and twenty-five year sales growth per share figures to find out which of these companies are the best.

Pay attention to the debt that a contemplated dividend stock investment carries.

Weight Watchers has been in existence since 1963, and after being a subsidiary of Heinz Ketchup, it was sold to Artal Luxembourg, S.A. in a leveraged buyout that saddled Weight Watchers with $757 million in debt.

Even though Weight Watchers has been profitable in each of the past fifteen years, the debt which ballooned to $2 billion became so extreme that it created a balance sheet risk. From 2007 through 2012, Weight Watchers paid a $0.70 dividend. The profits were steadily improving. You might have thought: “Gee, this company has room to grow its dividend payout over the next decade.” That intuitive view based on earnings would have been wrong because it was incomplete and ignored the $100+ million in interest payments that Weight Watchers must make even while it is only working with a base of $60 million in annual profits.

The dividend was suspended in 2014, and Weight Watchers hasn’t made a cash payout to shareholders since then. You could have identified this ahead of time by paying attention to the balance sheet. The debt was so extreme that you couldn’t justify shipping out cash to shareholders when the debt principal was 40x greater the annual cash flows.

On the other hand, a business like Johnson & Johnson is currently sitting on $42 billion in cash. Not only does it have the earnings to support growing dividends, but it also has

You should note that I speak in terms of per share figures. Companies that grow their dividends have a tendency to keep their share count under control.

If you’ve been a long-term reader of my work, you’ll notice that I never talk up the real estate investment trust called The Washington REIT (WRE). Why? Because it keeps diluting its equity pool by issuing new shares at suboptimal rates.

It owns 54 properties in the D.C. area. It collected $92 million in rental cash flows back in 2006, and collects $120 million in rental cash flows now. Sounds like a pretty good deal, right? Nope.

Turns out, Washington REIT keeps issuing new shares each year so the share count base increased from 43 million to 73 million over the past ten years. Each share that earned rental income of $2.12 per share in 2006 only earns $1.77 per share now. You’ve gotten poorer because the Washington REIT keeps diluting ownership of its properties while the growth in rental income comes in at a lower rate than the rate of share dilution.

That is why it shouldn’t have come as a surprise when the Washington REIT cut its dividend from $1.74 in 2011 to $1.20 per share in 2013. If you paid attention to the gap between per share results and company-wide performance, you could have recognized that Washington REIT wasn’t going to be a company that grew its dividend every year.

At a minimum, corporations that grow their dividends tend to keep the share count under control. Over the past sixteen years, General Mills has grown its dividend at a 9% annual rate. If you look at the share count way back in 2000, you will see that there were 570 million shares outstanding. Today, there are 590 million shares outstanding. Considering that General Mills had to issue a bit of stock to make some yogurt acquisitions, that is very impressive. Whenever General Mills reports gains in earnings, you can be sure that your share of the earnings are always increasing. Pay attention to the integrity of per share earnings—it can tip you off to any differences between headline results and actual growth in the intrinsic value of your investment.

If you take into consideration dividend histories, don’t forget to apply common sense.

I am much more concerned about earnings growth than dividend histories when I study cash-generating investments. For instance, Vectren has increased its dividend every year since the 1960s. But you won’t see me writing about it as a potential investment to consider because the dividend has only grown at a rate of 2.2% over the past twenty years. Inflation was 3% during this time. The cash payouts grew but didn’t even increase your purchasing power.

Meanwhile, a company like Dr. Pepper will only report that it has raised its dividend every year since 2010. From a historical analysis perspective, it doesn’t seem that great. Well, the reason for the gaps is because Teddy Forstmann of Forstmann Little took Dr. Pepper private and extracted twelve times the amount of cash that he invested into it over a span of just two years. He completely sucked it of capital. The cash-generating power of the Dr. Pepper brand has always been there—it’s just that the company has a history of catching the eye of private equity that has caused its dividend history to be interrupted. I would not “penalize” the stock for having a short dividend history because dividend histories are only useful to the extent that they can inform our views of the future, and Dr. Pepper has a record of growing profits at about 7.5% through all business conditions. I’d use that profit growth as my guide.

The dream companies that grow their dividends every year will combine all of the ideal characteristics.

There is a reason why Visa stock has a special place in my coverage of investments on the site. It checks off so many boxes that facilitate long-term dividend growth. Does it see increasing sales volume? Yep, at a rate of 8-11% per year. Does it give investors share integrity? Yep, it actively repurchases its own stock, and has reduced the number of shares outstanding from 3 billion to 2.1 billion over the past eight years so each share represents about a one-third larger claim on the earnings than it did back in 2008. Profit margins have increased from the insane figure of 32% to an even more insane figure of 39%, making the business economics so strong that the United States Congress feels an obligation to regulate it because it is raining down so many profits upon its shareholders. And does it have room to increase its dividend payout ratio over time? Yep, it makes $6 billion in profits and only sends a little over $1.2 billion of that to shareholders. And given that people use cash less and less, it also has a tailwind for future growth. Over the next ten to fifteen years, you would be hard-pressed to find a company that grows its dividend at a faster rate than Visa.

Conclusion: It is pretty doable to find the firms that have the best chance to grow their dividends over the long run. The most important metric is earnings per share growth. By looking at historical records of sales growth per share, you can figure out the health of the specific business and the industry as well. From there, you should pay attention to debt on the balance sheet, the integrity of the share count, and the dividend payout ratio. Certain businesses like Visa check off all the boxes, and your task is to find a dozen Visa-type investments over the course of your life.