The 3 Fastest-Growing Dividend Kings For Growing Income (Guestpost by Suredividend.com)

The 3 Fastest-Growing Dividend Kings For Growing Income

Investors that focus on reliable and growing dividends should take a look at the Dividend Kings. This is a group of stocks that have raised their payouts for at least 50 years in a row.

Such a feat is only possible for those companies that operate with a long-term focus. On top of that, resilient business models are important. Strong brands, healthy balance sheets, competitive advantages, or strong market positions (relative to peers), are helpful as well for companies that want to raise their dividends reliably decade after decade. In this report, we’ll take a look at three Dividend Kings that are remarkable due to their strong growth.

1: Lowe’s

Lowe’s (LOW) is a home improvement retailer. Together with its peer Home Depot, it controls a large portion of the market in its home country, the United States. This oligopoly has allowed both companies to operate with attractive margins and to generate healthy profits that have risen considerably over time. Lowe’s operates around 2,200 stores, most of them in the US, with some being located in Canada.

Lowe’s operates with a somewhat cyclical business model, since sales volumes, revenue, and the profits that the company generates are dependent on the strength of the US housing market to some degree. Over the last couple of years, the environment has been highly beneficial for Lowe’s, as a housing boom resulted in record profits for the company. But even during economic downturns, Lowe’s has been able to operate profitably in the past, thus the cyclicality of the business is not too pronounced — otherwise, the 59 years of dividend growth in a row would not have been achievable.

In 2022, Lowe’s has raised its dividend by 31%, which is one of the largest dividend increases of the last couple of years. Lowe’s has reported very encouraging profit growth in recent quarters, which is why management decided to offer an above-average dividend hike for the company’s owners.

During its most recent quarter, Lowe’s saw its earnings-per-share climb to $3.51, which was up 9% versus the previous year’s quarter. Higher sales in the company’s Pro business, as well as a decline in Lowe’s share count, were responsible for most of the earnings-per-share increase during the period.

During the first quarter alone, Lowe’s has bought back around 3% of its float. The company has guided towards share repurchases of around $12 billion this year, which is equal to around 10% of its shares, using current prices. This should have a major positive impact on Lowe’s earnings-per-share performance this year and should ease the impact of a housing slowdown.

With a dividend yield of 2.2% and forecasted long-term earnings-per-share growth potential of 6%, Lowe’s should be able to deliver total returns in the 8% range before factoring in potential multiple expansion tailwinds. Since Lowe’s is trading for just 14x this year’s net profits today, valuation expansion seems more likely than valuation compression, which could boost returns above the 8% level.

2: Stanley Black & Decker

Stanley Black & Decker (SWK) manufactures and sells a wide range of power tools and industrial equipment. Its product portfolio includes electric power tools, fastening and welding equipment, garden products, and so on.

The company was created in 2010, when Stanley Works and Black & Decker merged to create Stanley Black & Decker in its current form. Its roots can be traced back to 1843, however, which gives the company a history that spans almost 180 years.

Stanley Black & Decker has raised its dividend for 54 years in a row. Even during recessions, the company has proven to be sufficiently defensive and resilient, which is far from a given, considering Stanley Black & Decker’s exposure to a wide range of industrial end markets.

During the most recent quarter, Stanley Black & Decker was able to grow its revenue by a highly attractive 20% year over year. Price increases were a major factor in that, as Stanley Black & Decker was able to pass on inflationary pressures easily to its customers, thanks to its strong market position in many of the areas the company is active in.

The company is forecasted to earn around $10 per share this year, which is slightly below the previous year’s level. A recession during the coming quarters has become more likely in the US, which is why analysts have lowered their estimates in recent months. On top of that, Stanley Black & Decker was extremely profitable during H2 of 2021, which makes for a tough comparison.

Despite a small earnings decline being forecasted for the current year, dividends in 2022 will set a new record. Without any further dividend increase during the remainder of the year, the current payout of $3.16 per share would be 6% higher than what Stanley Black & Decker paid out last year.

Today, Stanley Black & Decker offers a dividend yield of 2.7%. Based on the company’s past track record, we believe that the company should be able to grow its earnings-per-share by around 8% a year in the long run. The combination of its current yield and the forecasted growth makes us believe that 10%+ annual returns are likely.

3: Parker-Hannifin

Parker-Hannifin (PH) is an industrial company. It is active in the motion control space, where Parker-Hannifin produces goods that are used in the aerospace and defense industry, but also in a diversified range of other industries, including automotive, transportation, cooling, packaging, and so on.

The company, which is currently valued at $35 billion, has raised its dividend for 66 years in a row — through recessions, oil embargoes, market crashes, pandemics, and so on. A key factor for PH’s ability to raise its dividend consistently for so long is its relatively low payout ratio.

During the current year, Parker-Hannifin will likely pay out around 29% of its profits in the form of dividends. This means that even a 50% earnings drop in the following year (which is extremely unlikely) would only result in a high-50s payout ratio — which wouldn’t force the company to cut the dividend. 

During the most recent quarter, Parker-Hannifin saw its revenue rise by 9%, while earnings-per-share were up by 17% year over year. The strong profit growth rate was the result of higher sales, higher margins, and the impact of Parker-Hannifin’s buybacks.

Parker-Hannifin pays out a dividend of $5.32 per year today, which is 29% higher than the dividend that the company paid out before raising the payout this April. The dividend yield is 1.8% at current prices. This isn’t the highest yield among the Dividend Kings by far, but still considerably more than the 1.5% yield that the broad market offers today. On top of that, investors get strong dividend growth and a low payout ratio that makes the dividend very secure.

We do believe that Parker-Hannifin will be able to grow its earnings-per-share by around 8% a year in the long run, which means that total returns in the 10% range seem quite realistic.

Takeaway

Those investors that look for very reliable dividend growth from companies that have stood the test of time should delve into the Dividend Kings. These companies combine strong, resilient business models and a shareholder-focused approach when it comes to utilizing cash flows. Lowe’s, Stanley Black & Decker, and Parker-Hannifin are three of the most intriguing Dividend Kings today and could be attractive long-term picks for dividend growth investors.

This is a guestpost by Suredividend.com.