The Power of Dividend Growth Investing: Building Wealth Through Rising Income
Dividend growth investing has long been a favorite strategy for investors seeking to build long-term wealth and generate reliable income streams. By focusing on companies that not only pay dividends but consistently increase them over time, investors can potentially benefit from both capital appreciation and growing cash flows. Let’s explore why dividend growth matters and how investors can use it.
Why Dividend Growth Matters
Dividend growth is important for several key reasons:
- Inflation Protection: As the cost of living rises over time, growing dividends help maintain and potentially increase your purchasing power.
- Compounding Returns: Reinvested dividends can accelerate portfolio growth through the power of compounding.
- Quality Indicator: Companies that consistently raise dividends often demonstrate financial strength, disciplined management, and sustainable business models.
- Downside Protection: Dividend-paying stocks tend to be less volatile during market downturns, providing a cushion for investors.
- Flexibility for Investors: As dividends grow, investors gain options to reinvest for further growth or use the increasing income for other purposes.
5 Stocks with Strong Dividend Growth Passing Validea’s Guru Models
Let’s take a deeper look at five companies that demonstrate strong dividend growth characteristics and receive high ratings from Validea’s guru-inspired investment models:
1. Applied Materials Inc (AMAT)
Applied Materials is a leading materials engineering solutions provider for the semiconductor, display, and related industries.
- Dividend Growth: 35% over 3 years. 14% over one year.
- Key Model Scores:
- Warren Buffett-inspired Patient Investor: 100%
- Peter Lynch-inspired P/E Growth Investor: 91%
Warren Buffett Patient Investor Model (100%): This model looks for companies with consistent earnings, high returns on equity, and manageable debt levels. AMAT excels in these areas:
- Consistent earnings growth over the past decade, with only one minor dip 5 years ago
- Exceptional average Return on Equity of 35.3% over the last 10 years
- Strong ability to pay off debt, with earnings of $7,203.6 million compared to debt of $5,463.0 million
- Projected future EPS of $89.39 in ten years, indicating strong growth potential
Peter Lynch P/E Growth Investor Model (91%): Lynch’s strategy focuses on the PEG ratio (Price/Earnings relative to Growth) and favors companies with PEG ratios below 1. AMAT scores well here:
- PEG ratio of 0.99, indicating the stock is reasonably priced relative to its growth rate
- Strong EPS growth rate of 24.6%
- P/E ratio of 24.38, which is reasonable for a company with this growth rate
- Low debt-to-equity ratio of 31.05%
2. Costco Wholesale Corporation (COST)
Costco operates a chain of membership-only warehouse clubs, offering a wide range of merchandise at discounted prices.
- Dividend Growth: 40% over 3 years. 12.4% over one year.
- Key Model Scores:
- James O’Shaughnessy-inspired Growth/Value Investor: 100%
- Wesley Gray-inspired Quantitative Momentum Investor: 100%
James O’Shaughnessy Growth/Value Investor Model (100%): This model combines growth and value factors, looking for companies with strong relative strength and reasonable valuations. Costco excels in these areas:
- Market cap well above the $150 million minimum at $364,421 million
- Consistent earnings growth each year for the past five years
- Price to sales ratio of 1.44, below the 1.5 maximum
- Strong relative strength, ranking in the top 50 of stocks screened
Wesley Gray Quantitative Momentum Investor Model (100%): This strategy focuses on stocks with strong and consistent momentum over the intermediate term. Costco stands out here:
- Twelve-month minus one-month return of 55.58%, ranking in the top 10% of stocks
- Exceptional return consistency, with a score placing it in the top 1% of the database
- Low volatility, with a 3-year standard deviation of returns at 24.1%, below the market median
PulteGroup is one of the largest homebuilders in the United States, operating through various brands.
- Dividend Growth: 33% over 3 years. 12.2% over one year.
- Key Model Scores:
- Pim van Vliet-inspired Multi-Factor Investor: 100%
- Peter Lynch-inspired P/E Growth Investor: 93%
Pim van Vliet Multi-Factor Investor Model (100%): This model looks for large, low-volatility stocks with strong shareholder yields and momentum. PHM excels in these areas:
- Market cap of $27,393 million, placing it among the top 1000 stocks
- Low volatility with a 3-year standard deviation of returns at 35.5%, below the market median
- Strong net payout yield of 6.45%, ranking in the top 13% of the database
- Solid 12-month minus 1-month return of 25.08%
Peter Lynch P/E Growth Investor Model (93%): As with AMAT, this model focuses on the PEG ratio and favors fast-growing companies at reasonable valuations:
- Classified as a “fast-grower” with an EPS growth rate of 32.9%
- Very favorable PEG ratio of 0.31
- Low P/E ratio of 10.06, well below the 40 maximum for a company of this size
- Low debt-to-equity ratio of 19.37%
Reliance is a leading metals service center company, providing value-added metals processing services and distributing a wide range of metal products.
- Dividend Growth: 60% over 3 years. 14.9% over one year.
- Key Model Scores:
- Peter Lynch-inspired P/E Growth Investor: 91%
- Kenneth Fisher-inspired Price/Sales Investor: 90%
Peter Lynch P/E Growth Investor Model (91%): RS performs well on Lynch’s growth at a reasonable price criteria:
- Classified as a “fast-grower” with an EPS growth rate of 29.1%
- Favorable PEG ratio of 0.53
- P/E ratio of 15.55, well below the 40 maximum for a company of this size
- Low debt-to-equity ratio of 15.00%
Kenneth Fisher Price/Sales Investor Model (90%): Fisher’s model focuses on low price-to-sales ratios and strong earnings growth:
- Price to sales ratio of 1.19, within the “good values” range of 0.75 to 1.5 for non-cyclical companies
- Low debt-to-equity ratio of 15.00%
- Strong inflation-adjusted EPS growth rate of 26.77%
- Positive free cash flow per share of 16.34
- Healthy three-year average net profit margin of 9.95%
Shoe Carnival is a family footwear retailer offering a broad assortment of moderately priced dress, casual, and athletic footwear.
- Dividend Growth: 149% over 3 years. 22.8% over one year.
- Key Model Scores:
- Dashan Huang-inspired Twin Momentum Investor: 94%
- Peter Lynch-inspired P/E Growth Investor: 93%
Dashan Huang Twin Momentum Investor Model (94%): This model looks for stocks with strong fundamental and price momentum:
- Fundamental momentum score in the top 10% of the database
- Twelve-month minus one-month return of 37.24%, ranking in the top 15% of stocks
- Combined fundamental and price momentum ranking in the top 3% of the database
Peter Lynch P/E Growth Investor Model (93%): SCVL shows strong growth at a reasonable price characteristics:
- Classified as a “fast-grower” with an EPS growth rate of 33.8%
- Very favorable PEG ratio of 0.46
- P/E ratio of 15.70, well below the 40 maximum for a company of its size
- Exceptionally low debt-to-equity ratio of 0.00%
Dividend growth investing offers an interesting strategy for building long-term wealth and generating rising income streams. By focusing on quality companies with a track record of increasing dividends, investors can potentially benefit from both capital appreciation and income. The five stocks highlighted here demonstrate strong dividend growth characteristics and receive high ratings from Validea’s guru-inspired models, offering a starting point for further research into dividend growth opportunities.
Further Research
