In this feature, we delve into the world of stocks that have not just rapidly grown their dividends but also are projected to experience a meteoric rise in earnings in the near future. When you talk about these high-growth stocks, you’re looking at lightning-fast price surges, although their current yields might not give you huge returns. You see, the catch is they may not offer very high current yields because, well, life’s like a box of chocolates – you never know what you’re gonna get. With high-growth stocks, it’s all about being content with a low current yield, at least for now. Ah, but remember, nothing in the stock world is set in stone. Over time, their business model might mature or new competitors/technology might emerge, altering their growth pattern. That’s why it’s absolutely crucial to keep a hawk’s eye on these stocks; I’m talking at least every quarter.
If you’re yearning for those higher yields, fret not! Take a gander at the latest article in our monthly series titled “5 Relatively
Safe and Cheap DGI
,” which focuses on moderate to high current income – favoring high-yield names. However, no matter your stance – whether it’s high dividend growth or high current income – quality is paramount in the companies you choose, as well as the price you pay.
Note: Remember, the stocks spotlighted in this article are not buy recommendations, but rather potential candidates for further analysis. Always conduct your due diligence, aligning with your financial goals and risk tolerance. Furthermore, some sections in this article may appear repetitive from month to month for the benefit of new readers. These sections would be swathed in “italics,” so those well-acquainted with our publication can give them a skip.
Why Plump for High Growth Dividend Stocks?
There are two types of dividend stocks that a DGI investor can choose from depending upon their individual situation, goals, and investing time horizon:
High Growth Low Yield [HGLY]
Low Growth High Yield [LGHY].
As the names suggest, the HGLY category would have stocks that offer a high rate of dividend growth but usually a low current yield. These stocks would normally have low payment ratios, manageable levels of debt, and rapidly rising earnings.
On the other hand, LGHY-type stocks would offer a high current yield (generally 3% and higher) but a lower rate of dividend growth. Generally speaking, these companies are more mature and stable businesses that have their hyper-growth period in the rearview but still grow modestly over time to support a low but stable growth in dividends.
Now, of course, there will be stocks that hover somewhere in between these two categories, for example, medium growth and medium current yield.
So, who should own HGLY-type stocks? Well, anyone who is in the accumulation phase and does not need the income currently and/or in the next five to ten years should own some high-growth dividend stocks. What’s more, folks (including retirees) with large investment capital that generates more income than they need (for example, 1.5x or 2x their income needs) should invest in HGLY-type stocks, at least partially.
How To Structure A Portfolio Based On This Remarkable Series
While structuring a portfolio based on this monthly series would hinge a lot on your personal goals, risk tolerance, investment methodology, and choices, here’s one way to go about it
- Set up a portfolio budget and make room for a maximum of 20 to 25 stocks over time.
- Divvy up your capital (present + future) into 20 equal parts.
- In the maiden month, snag 5 to 7 positions based on the top 10 stocks for that month.
- From the following month onward, snoop around for new stocks cropping up in the top 10 list that don’t feature in your portfolio, and add them (as many as your process and budget allow).
- Repeat step 4 until you hit 20 (or the max) positions.
Once you’ve notched up the maximum 20 or 25 positions and have no more money to splash, comb through some stocks based on your own digging. You could also peruse our monthly top 10 list and see if any of them merit an add. If you do decide to rope in a position, you’ve got to find one you’re willing to give the boot to accommodate the newbie. Also, it may be wise to regularly monitor your positions, preferably every month, or at least every quarter. Oh, and make sure you’re not heftily loaded on any particular sector or industry segment.
We will cherry-pick from our original dataset for the current month, which we collated from our other DGI series (5 Relatively Safe and Cheap DGI), and update it with the current data. We will then layer on additional criteria to sieve out stocks that have recorded a high rate of dividend growth recently and are likely to keep treading that path in the foreseeable future.
For a complete spreadsheet of this dataset, do take a gander at our original article. For clarity’s sake, we’ll jot down the original filtering criteria below:
- Market cap > $10 billion (with a few exceptions)
- Dividend yield > 1.0% (with some leeway for high quality but lower yielding companies)
- Daily average volume > 100,000
- Dividend growth past five years >= 0 (we’ll separately check for high growth later)
- Preferably, a minimum of 5 years of positive dividend growth
Following the above filter, we cooked up a score (Dividend Safety Quality Score) based on several factors:
- Current Yield
- Dividend growth history (number of years of dividend growth):
- Payout ratio – Preferably based on Free Cash Flow.
- Past five-year and 10-year dividend growth
- EPS growth (average of previous five years of growth and expected next 3-5 years’ growth)
- Chowder number – the sum of the 5-yr dividend growth rate and the current yield
- Debt/equity and Debt/asset ratios
- S&P’s credit ratings (Standard & Poor’s Global Ratings)
- Distance from 52-week high (current