Snatch Up Companies That Keep Giving Their Shareholders Raises

Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Everybody loves "easy" money. We can't help it. The good news is that when you are a shareholder of a dividend-paying company, you get paid for your stake in the company. You might get paid annually, semi-annually, every four months, or sometimes monthly. It doesn't matter as dividends are paid for simply waking up every morning. Don't under estimate the power of dividends, the graph below shows how much dividends contribute to total market returns over time:


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So you want a slice of the action right? Unfortunately, you shouldn't pick just any stock that pays a dividend. Even if a dividend stock has a high yield (percentage of the share price being paid as a dividend), that doesn't necessarily make it a quality dividend stock. While the high return may seem nice at first, it won't do you much good if the dividend gets cut, or if the dividend stagnates as inflation eats away at your buying power.

So what to look for? Two things. First, you want a company with a long track record of increasing dividends. Dividends are evidence of a company making profits and being able to distribute them to shareholders. If the company cuts, or stops raising its dividends - it's a solid bet that its business is not performing well. A long dividend history shows that a company can perform through the good times, and the bad.

Second, you want a company that has room to continue raising its dividend. As investors, we care more about the future than we do about the past. Therefore we are looking for companies that only use a small portion of their cash flow (dividends are paid with cash) for dividends. If a company has a lot of excess cash flow, it can use it to grow the company, or increase the dividend amount in the future. Check out these companies that fit both criteria, and that also have some reasons to expect their cash flow to also increase moving forward.

Have the duck

Aflac (NYSE: AFL) is a health and life insurance company that operates in Japan and the United States. Its current dividend is $0.35 a share paid quarterly. This dividend is only 4% of its free cash flow, giving Aflac much room to grow its dividend. Aflac has been raising its dividend annually for 30 consecutive years, at a 19.3% rate over the last 10 years.

Moving forward, Aflac looks poised to benefit from the economic environment. Interest rates are slowly rising, and a company such as Aflac benefits from this because its earnings partially depend on the interest rates it invests its cash in. Expanding in the United States will drive growth for Aflac. About 80% of its revenue currently comes from sales in Japan. Due to this fact, most of the revenue that Alfac brings in must be converted from yen to dollars. With the yen so weak right now, this is a headwind that Aflac faces. This currency headwind has nothing to do with the earnings quality of Aflac, and is pricing the stock at a nice discount to its "fair value".

Prescribe Walgreen to your portfolio

Walgreen (NYSE: WAG) is a drug store retail chain in the United States. Its current dividend is $0.275 per share paid quarterly. This dividend is 49.7% of free cash flow. Walgreen has raised its dividend annually for 37 years, and at a 21.2% rate over the last 10 years. While a growth rate this high is not sustainable forever, you can take comfort that it has the power to give inflation-beating raises for the foreseeable future.

Looking ahead, Walgreen is positioned nicely. It continues to pick up modest amounts of market share. According to its latest earnings report, Walgreen gained 80 basis points in market share, and script volume has improved 7%. Walgreen recently entered partner ships with AmerisourceBergen, and Alliance Boots. These partnerships will give Walgreen indirect international exposure as well as enable Walgreen to gain pricing leverage with suppliers on bulk drugs.

Do some home improvement

Lowe's (NYSE: LOW) is a home improvement retail chain in North America, based in the United States. Its current dividend is $0.18 per share paid quarterly. This dividend is 42.4% of free cash flow. Lowe's has raised its dividend every year for 51 years. Its dividend has grown at a rate of 31.1% over the last 10 years.

Lowe's will benefit for the foreseeable future from a housing market recovery as well as a home-building trend that will rise along with the general population. (After all, the human population is rising by 200,000 people a day!) Lowe's is also able to offer among the lowest prices in the industry due to pricing power with suppliers due to the massive size of its operations. Earnings quality moving forward will be something to keep an eye on as Lowe's looks to increase margins via cost-cutting measures.

Hit a bull's eye

Target (NYSE: TGT) is a North American retailer based in the United States. Its current dividend is $0.43 per share paid quarterly. This dividend is 30.8% of free cash flow. Target has raised its dividend at a 10-year growth rate of 18.6%. It has increased its dividend every year for the last 45 years. 

Target is currently utilizing two main projects that will drive growth long term. The first is the introduction of fresh meat and produce for sale across its stores. While its sale margins will take a hit from this, the overall goal is to drive customer traffic through its stores. The second project is an expansion into Canada. This expansion is increasing store count, and unlocking a new market. This is a brand new venture, and the jury will be out on this project for a couple more years.

The bottom line

These companies are good starting points to look for companies that have a proven record of paying shareholders, and evidence that they will continue to do so. While no business strategy is without risk, these companies all benefit from consumer-based trends that will move upward over time.  

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Justin Pope has no position in any stocks mentioned. The Motley Fool recommends Aflac and Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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