Four U.S. stocks to own for high dividend growth

Bronze-rated Franklin U.S. Rising Dividends' manager Don Taylor picks a technology stock, one industrial stock, a medical equipment stock and one semiconductor stock.

Ruth Saldanha 15 November, 2018 | 6:00PM

Most investors love dividends. Dividends provide steady cash inflows, which can be used or reinvested, making them a perfect add to the portfolios of almost all kinds of investors. But one question that many investors have is whether they should focus more on companies that pay high dividends now, or on those whose dividends are likely to grow in the future.

"In the context of an overall investment portfolio, even one focused on income, it is prudent to consider a combination of both dividend growers and high-yield stocks. Companies with a lower yield at present, but a good record of growing the dividend, and good prospects for continued growth in the business may well be the higher dividend companies of the future. Companies with a high dividend yield currently, but no signs of growth, may be in a stage of development where future dividends don't keep up with inflation or, in the worst-case scenarios, could be in jeopardy," says Michael Keaveney, Head of Investment Management at Morningstar Canada.

So if you want to consider companies with healthy dividend growth, where should you look? To answer this, we got in touch with Don Taylor, CIO of Rising Dividends Strategies for Franklin Equity Group and lead manager of the bronze-rated Franklin U.S. Rising Dividends.

"Historically, dividend payers have outperformed non-dividend payers, and dividend growers have outperformed dividend payers. We look for companies that consistently grow dividends. Our yardsticks for stock picking are companies that have historically doubled dividends over 10 years. Additionally, the companies should have increased dividends for at least eight out of the last 10 years”, Taylor said. Apart from dividends, the other factors he considers include historic track records, strong management, a strong position in the markets in which they operate, a stable market and discounted valuations.

The fund has returned 12.7% annualized over 10 years. It mainly invests in U.S. large-cap stocks, and has overweight positions in the industrials, healthcare, basic materials and consumer defensive sectors, relative to the S&P 500 Index. It is underweight on technology.

"We have noticed that certain sectors tend to be more focused on dividend growing than others. For example, within healthcare, medical equipment tends to have better dividend options than biotechnology or pharma. Within industrials, we like companies that are more diversified, with a varied end market. We also like companies with recurring revenues, typically with a long cycle and less quarter-on-quarter volatility. The basic materials sector doesn't generally work well for us, but we like some names in industrial gas. We also like  Albemarle (ALB), which is a chemical company that focuses on lithium, so it's more an electric vehicle play than pure chemical,” Taylor says.

Though the fund so far has been underweight on IT, going ahead Taylor sees some opportunity in the space, specifically with  Apple (AAPL).

"We don't have the stock right now, because it does not fit in our screener for a minimum of eight years of dividend increases over the past 10 years -- Apple currently has increased dividends for six years. It is, however a stock we will continue to watch," he said.

Taylor picks four stocks he would recommend in the dividend growth space:

Microsoft Corp. (MSFT)
Dividend yield: 1.7%
1-year dividend increase: 10%
10-year annual div. growth: 13%
Consecutive div. increases: 15 years

Four-star, wide-moat Microsoft is the first of Taylor's picks, and is also the largest holding in the fund with a weight close to 6%.

"Traditionally, Microsoft's PC software business has been a cash cow with high margins, but then it struggled with growth for a while. We saw the change in CEO as a good sign, and that has proved to be the case," Taylor says.

He believes he has good visibility on the company for years to come, and adds that as compared to the FAANG stocks, it seems to have better downside protection.

"We like Microsoft," Taylor says.

Honeywell International Inc. (HON)
Dividend yield: 2.3%
1-year dividend increase: 10%
10-year annual div. growth: 12%
Consecutive div. increases: 9 years

Another wide-moat stock, 3-star-rated Honeywell is a diversified company with four business segments: aerospace, home and building technologies, performance materials and technologies, and safety and productivity solutions.

"Over the past decade or so, Honeywell has done a great job of changing from an average industrial company to a great industrial company. It has a strong management and recurring revenues. It has better visibility than most other industrial companies," Taylor points out.

Stryker Corp. (SYK)
Dividend yield: 1.2%
1-year dividend increase: 11%
10-year annual div. growth: 19%
Consecutive div. increases: 25 years

Taylor's third pick is Stryker, which designs, manufactures and markets a wide array of medical equipment. Products include hip and knee replacements, endoscopy machines, embolic cords and others.

"It has a steady topline growth, which we see as being accelerated going ahead. The most important aspect of their growth comes from robotics, where they are emerging in a clear leadership position. This company has a lower dividend yield compared to the other two, but their sales growth is better than many in the field, and we have a good long-term visibility on topline”, Taylor notes.

Morningstar assigns Stryker a wide moat, but the stock is currently rated 2-stars.

Texas Instruments Inc. (TXN)
Dividend yield: 3.3%
1-year dividend increase: 24%
10-year annual div. growth: 21%
Consecutive div. increases: 15 years

Taylor's final pick is Texas Instruments, which manufactures chips that have end uses in consumer durables, industrials, automotive, communications and other end markets.

"The company has a dedicated dividend focus, which we like. We don't necessarily believe that the dividend growth will continue at 20%, but we do believe that dividends will grow as it is a dedicated part of their strategy. The stock is currently soft; however, it is at the lower end of the cycle and the market recognizes it. As a result, it is a timely time to consider this stock. We like it," Taylor says.

Texas Instruments currently trades in 4-star territory, and Morningstar analysts assign it a wide moat.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Albemarle Corp67.40 USD-0.53
Apple Inc222.77 USD0.94
Honeywell International Inc167.97 USD0.91
Microsoft Corp138.53 USD0.83
Stryker Corp220.48 USD0.95
Texas Instruments Inc129.31 USD-0.19

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca