Chevron stands to benefit as new oil and gas production comes on line in the Gulf of Mexico and Australia.© Fred Prouser / Reuters/Reuters
John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
When Donald Taylor is screening companies for the Franklin U.S. Rising Dividends Fund that he manages, the candidates have to pass a series of tests.
Each stock must:
- have raised its dividend in at least eight of the past 10 years;
- have at least doubled its dividend over the past 10 years;
- be trading in the lower half of its 10-year price-to-earnings range.
He and his team at Franklin Templeton Investments also look for companies with a conservative payout ratio (dividends as a percentage of profits), strong market position and a management team that has demonstrated an ability to reinvest funds back into the business profitably.
The goal is to find "companies that we think can grow their dividends by 8, 10 or 12 per cent a year, hopefully higher in some cases, for a long time to come," Mr. Taylor says.
With the economy showing signs of strengthening, Mr. Taylor offered up five U.S. dividend companies that stand to benefit from improving global economic growth.
We've included the yield, dividend payout ratio (dividends per share as a percentage of estimated 2013 earnings per share), 10-year annualized dividend growth rate and the price-to-earnings multiple based on earnings estimates for the current fiscal year.
Consider this list as a starting point for further research, and be sure to do your own due diligence before investing in any company.
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- Yield: 3.1 per cent
- Payout ratio: 30 per cent
- 10-yr. div. growth rate: 10 per cent
- P/E: 9.6
Chevron's oil and gas production is growing at a modest 1 per cent or so annually, but as new projects come on line in the Gulf of Mexico and Australia, production stands to increase to about 4 per cent by 2014, Mr. Taylor says. That, coupled with a decline in capital expenditures, should translate into double-digit dividend increases, he says. Although falling commodity prices and project delays are always a risk for energy stocks, Chevron's low P/E indicates that they are already reflected in the stock price.
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- Yield: 1.7 per cent
- Payout ratio: 29 per cent
- 10-yr. div. growth rate: 9 per cent
- P/E: 16.4
Pentair's filtration and processing division makes a wide range of water treatment equipment for residential, commercial and municipal applications, while its flow management business produces valves, pumps and other industrial products. The latter division, which was beefed up with last year's $4.9-billion (U.S.) acquisition of Tyco International's flow control business, "gives them more exposure to the energy sector and oil production, which is a nice aspect of that merger. And there are a lot of synergies they can get by combining these two companies," he says.
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Air Products and Chemicals Inc. (APD-NYSE)
- Yield: 2.9 per cent
- Payout ratio: 44 per cent
- 10-yr. div. growth rate: 12 per cent
- P/E: 15.4
Four large companies dominate the global industrial gas market, and "they tend not to be that competitive with each other," Mr. Taylor says. One of them is Air Products, which provides oxygen, nitrogen, hydrogen and other gases to industries such as food and beverage, health care and energy in more than 50 countries. "They're the strongest of the companies in delivering hydrogen to refiners on the U.S. Gulf Coast, and there are opportunities in China and emerging markets as well," he says.
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- Yield: 1.9 per cent
- Payout ratio: 27 per cent
- 10-yr. div. growth rate: 10 per cent
- P/E: 13.9
Dover is a diversified global manufacturer whose products are used in energy, communications, printing and other industries.
The company is also benefiting from growth in the smartphone market. "In recent years, through several acquisitions, it has gotten involved in speakers and microphones that go into mobile devices, with an increasing emphasis on sound quality," he says.
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United Technologies Corp. (UTX-NYSE)
- Yield: 2.4 per cent
- Payout ratio: 35 per cent
- 10-yr. dividend growth rate: 16 per cent
- P/E: 15
United Technologies' portfolio of well-known products includes Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, Carrier air conditioners and Chubb security systems.
The company is now focused on integrating the $16.5-billion acquisition of Goodrich Corp., the world's largest maker of aircraft landing gear, which it bought last year in a bid to capitalize on long-term growth in global air travel.
"They paid a full price for Goodrich but I think the synergies they can get by combining their existing businesses with it will make it worthwhile in the long run," Mr. Taylor says.
John Heinzl