I know of only one sure strategy for accumulating wealth over time, and that is to hold stocks with a consistent track record of dividend growth. The reason this strategy works is because dividend increases can be predicted in a way that share price gains cannot.
For example, I can come up with many reasons why Coco-Cola (NYSE: KO) or General Mills (NYSE: GIS) will increase earnings next year, but I can't guarantee that either company will post share-price gains. But by looking at the dividend history, payout ratio and earnings growth expectations for both companies, I can estimate next year's dividend increase with fairly good accuracy. A modest 6% dividend increase on a portfolio of stocks generating $10,000 in annual income would boost your income to $10,600 next year -- without requiring any additional investment. If you reinvest these (growing) dividends, then your returns and eventual dividends are amplified even more, thanks to the magic of compounding. And if dividends predictably rise year in and year out, then share-price gains should eventually follow.
There are at least 10 blue-chip names that not only have uninterrupted histories of paying dividends for 100 years or more, but have also increased dividend payments for at least 25 years in a row. This is a good place for investors to start. This list includes well-known companies such as Coca Cola, General Mills, Colgate Palmolive (NYSE: CL), PepsiCo (NYSE: PEP) and the following five higher-yielding blue-chip stocks.
1. Procter & Gamble Co. (NYSE: PG)
Procter & Gamble is a leading consumer goods manufacturer in more than 180 countries. The company owns 24 brands-- from Eukanuba pet foods, to Gillette shaving products and Tide detergents -- each generating more than $1 billion in annual sales. Procter & Gamble has also been good to shareholders. The company has paid annual dividends since 1890, and has raised its dividend in each of the past 55 years.
In the past five years, Proctor & Gamble has grown dividends 11% a year. Analysts predict the company's annual earnings growth will double from a 4% in the past five years to nearly 9% in the next five years. This should set the stage for a continuation of double-digit yearly dividend gains.
2. Johnson & Johnson (NYSE: JNJ)
Johnson & Johnson owns a diverse portfolio of pharmaceutical and consumer products, including top-selling over-the-counter medicines such as Tylenol, Motrin and Sudafed. Although highly-publicized recalls of Tylenol in the past two years have damaged the company's reputation and dampened the stock price, Johnson & Johnson has delivered 27 consecutive years of earnings growth and 49 straight years of dividend increases.
Johnson & Johnson has generated 11% annual growth in dividends and 7% growth in earnings in the past five years. It's also enhancing its future prospects by teaming up with Bristol Myer Squibb (NYSE: BMY) to enter the $10 billion market for Hepatitis-C drugs. Added to this superb track record, Johnson & Johnson boasts a stellar "AAA" credit rating and a stockpile of $31 billion in cash that can be returned to shareholders through dividends.
3. Consolidated Edison Inc. (NYSE: ED)
Also known as Con-Ed or Steady Eddie, this utility delivers electricity and/or natural gas to more than 4 million customers in New York City and surrounding areas.
As the nickname implies, Consolidated Edison's growth has been predictable, if unspectacular. In the past five years, the company's earnings have improved 3% annually, but dividends have grown at less than 1% a year. Recent dividend increases have mostly consisted of half-penny raises.
As is typical for utilities, Consolidated Edison's payout is fairly high at 64% of earnings. Still, analysts look for earnings growth to improve to 4% a year because of rate hikes and improving energy demand. Improved earnings growth makes it likely that Consolidated Edison will extend its record of 37 consecutive years of dividend growth.
4. Clorox Co. (NYSE: CLX)
Clorox is a global consumer-goods company with many brands that have become must-have household names. Nearly 90% of the company's portfolio consists of brands holding the No.1 or No.2 market share. In addition to Clorox bleach and cleaning products, the company owns Pine-Sol cleaner, Kingsford charcoal, Hidden Valley salad dressings and K C Masterpiece dressings and sauces, Brita water filters and Glad storage containers. Clorox sells its products in more than 100 countries.
In the past five years, Clorox's dividend has risen 14% a year, but earnings growth has been erratic. Despite this, the company's strong cash flow has consistently provided at least two-fold coverage of dividend payments, which gives a comfortable cushion for future dividend growth, which has already increased for 34 years in a row.
5. UGI Corp. (NYSE: UGI)
UGI distributes and markets propane, natural gas and electricity. Through subsidiaries, UGI operates natural gas and electric utilities in Pennsylvania, distributes propane domestically and internationally, and engages in energy marketing in the Mid-Atlantic region. The company also owns a 44% stake in AmeriGas Partners L.P. (NYSE: APU), the nation's largest retail propane distributor.
UGI has paid dividends for 127 consecutive years and raised its dividend in each of the past 25 years. Dividend growth averaging 8% a year in the past five years has outpaced yearly earnings growth of 5%. With dividend payout at less than 48% of earnings, UGI has ample capacity to raise the dividend.
Risks to consider: As a group, these stocks are remarkable for very low betas, which measures price volatility relative to the overall market. The market beta is one. These stocks have an average beta of 0.40, which means their share price swings are less than half the price swings of the market.
Action to take --> Because of their market presence and robust businesses, my top picks are Clorox and Proctor & Gamble. Analysts expect the earnings growth rates for these companies to accelerate due to expanding footprints in emerging markets. I also like Johnson & Johnson, but consider it a riskier pick because of recent product quality issues that have led to multiple recalls. UGI and Con-Ed provide lower, but predictable dividend earnings growth. Any of these stocks could be considered as core holdings for a dividend portfolio.