3 Dividend Growers for Your List

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

The stock market is on fire. Stocks have risen more than two times in price since the bull market started, in 2009. Still, now is not the time to cash out. Rather, it's time to get defensive.

Income investments, like dividend paying stocks, give investors much needed safety right now. That’s because income payers typically don't fall as far in down markets. So, in addition to income, there is downside protection should the market slump from here.

These income investments should be on your short list now.

Making a great dividend stock

Not all dividend stocks are winners. A great dividend stock should have a rising dividend, a low pay-out ratio, and a high yield. That's a tough feat to accomplish for any company, and it's exactly what makes Wal-Mart (NYSE: WMT) so special. 

Wal-Mart is probably not the first name that comes to mind when you think of "dividend monsters," which is exactly why it should be on your short list. The company is typically thought of as a rock solid, steady, grower, but that doesn't mean it's not a dividend dynamo. Rather, that growth is precisely why Wal-Mart has been able to pay a dividend for thirty nine straight years. 

One change that I've tried to make as an investor, is that I've tried to stop judging dividends on an "island." I'd recommend you do this as well. A lot of bad companies will try to lure us in by paying a ridiculously high yield. What we need is a healthy yield. Dividends come from earnings, and earnings are something that Wal-Mart increases regularly.

The company has increased its dividend ten times in ten years, yet it still has a scant pay-out ratio (below 40%) to go with its 2.5% yield. So consider Wal-Mart for your short list and keep an eye on same store sales. If the company can keep its U.S. same store numbers afloat, the dividend increases should continue. 

Delicious dividends

Another fast grower with dividend fortitude is Yum! Brands (NYSE: YUM). Yum! has doubled its dividend over the past five years and today the yield sits just under 2%. That may not sound like a huge pay-out but, with this business is increasing its earnings rapidly, your dividend will be much higher in the future.   

Yum! is a classic example of why we shouldn't forget the important link between earnings growth and dividends; the latter cannot exist without the former. 

I like Yum!'s chances of increasing its dividend because its current pay-out is so low, just 40%. Further, this company is coming off of a series of blows in its fast growing Chinese business due to bad public relations, and that is starting to turn-around. Even better, Yum!'s Taco Bell brand has seen a "re-birth" thanks to the ingenious marketing campaign of its new "Doritos" taco line.

Yum owns and operates KFC, Taco Bell, and Pizza Hut, three truly unique brands. What makes these brands so unique is that they offer something in the fast food space that other large competitors do not. Just think about that for a second; Burger King can't say that, neither can McDonald's. I'm a big fan of Yum! as a growth and safety play. If the Chinese PR mess cleans up, then Yum!'s recent upgrade by UBS (price target of $80) will prove to be too conservative. 

Dividend Deere

Deere (NYSE: DE) is the epitome of dividend growth. Deere has paid a dividend for thirty one straight years, and they've doubled the dividend in the past five years. Moving further down our check list Deere has the lowest pay-out on this list, just 25%, and a nice yield of 2.3%.

I think the long-term outlook for Deere's business is tremendous. Despite a weak commodity and crop outlook in the near-term, the company has been reporting record sales and profits. This company helps make the world easier to feed by providing farmers with equipment they can trust.

The weak crop environment over the past few months has kept the stock price range bound, despite the wonderful earnings. As that cycle changes I could see the dividend going higher along with the stock price. I think this stock is one of the few true values left today, and the low pay-out ratio makes me think the dividend should be safe for the long haul. 

Obviously, like all value stocks, if we're buying, someone else must be selling and they have a reason. So do your own homework on Deere before lining up to pile all of your money into shares.

Happiness is a check in the mail

There's something satisfying and reassuring about income-producing investments. That monthly or quarterly check in the mail brings happiness. Your shares could stay flat, or even decline, for a short period of time and you can still make money. Even better, you'll be less likely to sell at the absolute worst time.

Volatility has been eerily low lately, even as instability ravages many leading world economies. The market will probably not crash, but it’s unlikely that it will stay this stable.

So put these wonderful investments on your list today. Buy a few shares now, and you’ll have the confidence to buy more in both good times and bad.

Your mailbox is waiting.


Adem Tahiri owns shares of Deere & Company. The Motley Fool has no position in any of the stocks mentioned. 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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