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yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

For decades, kids have been getting Hershey candy in their Halloween loot. What's less well known is that the largest U.S. chocolate maker has also served up plenty of treats for dividend investors over the years.

Buoyed by rising sales and profits, Hershey Co. has boosted its dividend at an annual rate of 11.5 per cent over the past decade, during which time the payout has tripled. And lately, the hikes are getting bigger: The most recent increase, in July, was more than 15 per cent – a sign the company sees more good things ahead.

Admittedly, Hershey's yield of 1.9 per cent isn't high enough to whet the taste buds of some dividend investors. But given the company's solid growth prospects, the dividend will almost certainly continue to rise. While the stock is by no means cheap, for long-term investors who aren't spooked by stock market volatility, Hershey could produce some sweet returns.

"You'd be hard-pressed to find better visible earnings growth anywhere in food," Janney Capital Markets analyst Jonathan Feeney, who has a "buy" on the shares, said in a recent note.

Hershey has several things going for it: A stable of iconic brands such as Hershey's, Reese's, Twizzlers, Almond Joy, Mounds and Jolly Rancher; a roughly 30-per-cent share of the U.S. confectionery market that gives the company enviable pricing power; a low level of competition from private-label candy producers; and huge growth opportunities in China, India, Brazil and other emerging markets.

Even as it has been spending more to bolster its core brands and support new product launches – advertising spending was up 22 per cent in the most recent quarter – Hershey has kept other costs down by closing underperforming plants and outsourcing some production in a bid to become more efficient. All of this has contributed to double-digit growth in adjusted earnings per share in each of the past four years, according to Bloomberg data.

Hershey's third-quarter results, released on Oct. 24, continued the trend. Sales grew 6.1 per cent to $1.85-billion (U.S.) and adjusted earnings – which strip out one-time items – surged 19.5 per cent to $236.6-million or $1.04 a share, reflecting Hershey's improving profit margins. Helped by falling commodity costs, higher supply chain productivity and cost-saving measures, the adjusted gross margin jumped by an impressive three percentage points to 46.2 per cent.

Fortunately for Hershey, consumers are still demanding their chocolate fix even in a sluggish economy.

"Volume continues to be a driver of our net sales growth despite macroeconomic challenges in the broader marketplace," Hershey president and chief executive John Bilbrey said in the third-quarter earnings release. The fourth quarter, he added, "is off to a good start."

Looking further out, Mr. Bilbrey raised Hershey's long-term earnings per share growth target to 9 to 11 per cent from 8 to 10 per cent previously, citing international expansion, a pipeline of new products (York Minis, Hershey's spreads and Lancaster soft caramels among them) and strong marketing support for its key brands.

Still, some analysts say the surging stock is too rich for their taste. The shares have gained about 42 per cent this year, including dividends, compared with a 26-per-cent total return for the S&P 500 Index. (Since Yield Hog first profiled Hershey in May, 2012, the shares have returned 53 per cent, including dividends.)

The stock is now trading at a multiple of about 24 times estimated 2014 earnings per share, "which is well above the packaged food peer group and overall consumer staples averages," said analyst Jack Russo of Edward Jones, the only analyst who has a "sell" rating on the shares.

Among the other 18 analysts who follow the company, 11 have "holds" and seven have "buys." The average price target is $101.36, slightly higher than Tuesday's close of $100.90 on the New York Stock Exchange.

For a company with such predictable earnings growth, Hershey deserves a premium valuation. However, should the company put out a disappointing earnings report, the stock could turn into a gooey mess in a hurry. That's one thing to keep in mind if you're looking at Hershey to satisfy your craving for rising dividends.