9 Dividend Growth Stocks That Smart Money Is Buying

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During the past few years, the economy has been hit by one crisis after another and central banks all over the world have been applying expansionary monetary policies. Federal Reserve recently decided to maintain its ultra-low interest rate policy for three more years. We do not like the Fed’s inflationary policies and we are concerned that these policies will lead to inflation. Therefore, we have been recommending investors to focus on high dividend stocks. We believe that dividend stocks, especially those with strong growth rates, can provide some inflation protect and deliver better returns than long-term treasury bonds.

One of the practical ways to select dividend growth stocks is to focus on what institutional investors are buying. Institutional investors are much smarter than individual investors. They usually devote significant resources in researching stocks and the market. Below we compiled a list of dividend growth stocks with positive institutional transactions. All companies have dividend yields of 3-5%, market cap of at least $10 billion, and EPS growth rate is expected to be over 5% over the next five years. The market data is sourced from Finviz.

<table> <tbody> <tr> <td> <p>Ticker</p> </td> <td> <p>Company</p> </td> <td> <p>Dividend Yield</p> </td> <td> <p>EPS growth</p> </td> <td> <p>Institutional Transactions</p> </td> </tr> <tr> <td> <p>BLK</p> </td> <td> <p>BlackRock, Inc.</p> </td> <td> <p>3.00%</p> </td> <td> <p>16.28%</p> </td> <td> <p>0.25%</p> </td> </tr> <tr> <td> <p>ETN</p> </td> <td> <p>Eaton Corporation</p> </td> <td> <p>3.06%</p> </td> <td> <p>10.83%</p> </td> <td> <p>0.64%</p> </td> </tr> <tr> <td> <p>GE</p> </td> <td> <p>General Electric Company</p> </td> <td> <p>3.60%</p> </td> <td> <p>13.23%</p> </td> <td> <p>0.25%</p> </td> </tr> <tr> <td> <p>KMI</p> </td> <td> <p>Kinder Morgan, Inc.</p> </td> <td> <p>3.85%</p> </td> <td> <p>26.06%</p> </td> <td> <p>0.11%</p> </td> </tr> <tr> <td> <p>MAT</p> </td> <td> <p>Mattel Inc.</p> </td> <td> <p>3.12%</p> </td> <td> <p>10.60%</p> </td> <td> <p>0.77%</p> </td> </tr> <tr> <td> <p>MTB</p> </td> <td> <p>M&T Bank Corporation</p> </td> <td> <p>3.51%</p> </td> <td> <p>11.53%</p> </td> <td> <p>0.50%</p> </td> </tr> <tr> <td> <p>OKS</p> </td> <td> <p>ONEOK Partners, L.P.</p> </td> <td> <p>4.35%</p> </td> <td> <p>12.00%</p> </td> <td> <p>0.05%</p> </td> </tr> <tr> <td> <p>PAYX</p> </td> <td> <p>Paychex, Inc.</p> </td> <td> <p>4.05%</p> </td> <td> <p>10.93%</p> </td> <td> <p>0.14%</p> </td> </tr> <tr> <td> <p>RSG</p> </td> <td> <p>Republic Services, Inc.</p> </td> <td> <p>3.03%</p> </td> <td> <p>14.15%</p> </td> <td> <p>0.91%</p> </td> </tr> </tbody> </table>

Republic Services (NYSE: RSG) has the highest institutional transaction among all the dividend growth stocks listed above. It has an institutional transaction of 0.91%. RSG also has a decent dividend yield of 3.03% and its EPS is expected to grow at 14.15% per year in the next five years. Republic Services provides services in the non-hazardous solid waste industry. The company has been increasing its dividend payouts for 9 consecutive years. Recently it increased its quarterly dividend from $0.20 per share to $0.22 per share, which was paid in October. RSG has a market cap of $11B and a P/E ratio of 20.33. At the end of September, there were 15 hedge funds with RSG positions. For example, John Osterweis’ Osterweis Capital Management had $88 million invested in RSG. Bill Miller, Israel Englander and Paul Tudor Jones are also bullish about RSG. Republic Services will announce its fourth quarter earnings on February 9th. Analysts are projecting earnings of 45 cents per share for the quarter and $1.88 for the year. Its forward PE ratio is less than 15. These numbers indicate that the stock is fairly valued compared to the rest of the market. Its payout ratio is less than 50% based on forward earnings and the company has plenty of room to boost its dividends. We believe this stock is an excellent choice for long-term income investors.

One mega-cap dividend growth stock that smart money is buying is General Electric Company (NYSE: GE). It has a market cap of $200B and a P/E ratio of 15.37. GE also has a high dividend yield of 3.60% and an institutional transaction of 0.25%. Over the next five years, its EPS is expected to grow at 13.23% per year. For the 12 months ending 2011, the company reported annual net income of $14.2 billion, up from $11.6 billion for the 12 months ending 2010. GE is a popular stock among hedge funds. There were 44 hedge funds with GE positions at the end of the third quarter. For instance, Ken Fisher’s Fisher Asset Management had $478 million invested in GE. General Electric's forward PE ratio is slightly above 12. Its operating EPS excluding effects of preferred redemption was $1.34 for the ful year. This indicates that GE's dividend payout ratio is less than 50% based on its forward earnings. It is a little bit riskier than RSG but we like GE better as a long-term dividend growth play. Investors who buy the stock now will potentialy enjoy 5% effective dividend yields in about 4 years.

Another dividend growth stock with positive institutional transaction is Kinder Morgan Inc (NYSE: KMI). It has an institutional transaction of 0.25%. KMI has a dividend yield of 3.85% and its EPS is expected to grow at 26.06% annually in the next five years. It reported net income of $152 million for the third quarter of 2011, up from $11 million for the same period a year ago. KMI has a market cap of $23B and a P/E ratio of 45.41. At the end of September, there were 11 hedge funds disclosed to own KMI in their 13F portfolios. For example, Jean-Marie Eveillard’s First Eagle Investment Management had $157 million invested in KMI. Kinder Morgan made a great move with its El Paso buyout offer. It isn't interested in El Paso's volatile exploration and production business. Instead, Kinder Morgan will strengthen its position by getting El Paso's midstream pipeline and other assets. The company will be the No. 1 independent transporter of petroleum products with its 80,000 miles of pipelines. We like the stock and the management. Long-term investors in Kinder Morgan will benefit significantly from the explosive growth of the natural gas industry.

Smart money is also purchasing the following dividend growth stocks: BlackRock Inc (NYSE: BLK), Eaton Corporation (NYSE: ETN), Mattel Inc (MAT), M&T Bank Corporation (MTB), ONEOK Partners LP (OKS), and Paychex Inc (PAYX). Blackrock boosted its dividends by more than 750% since 2003 and currently trade at an attractive forward PE ratio of 14.5. Eaton also boosted its dividends by around 700% since 2003 and has a very attractive forward PE ratio of 11.5. We like dividend stocks. Our past study has shown that high dividend yielding stocks outperformed the market by an average of 1.36% per year between 1927 and 2009. We think investors should play more defensively by investing in dividend growth stocks that will potentially boost their payouts significantly over the next few years.


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