Suppose you were a job hunter presented with two options: a position offering a flat $50,000 per year with no pay hikes or one starting at $40,000 with a guaranteed 10% raise each year.
If you were only a year away from retirement, the first option would make more sense. But for those with a bit longer to go, option number two would be the better deal. Not only will your paycheck grow each year, but it will do so by an increasing amount -- $4,000 after the first 12 months, $4,400 after the next 12, and so on.
After just five years, you would be pulling down about $64,000 per year. And if the base compensation alone didn't sway you, what if I also mentioned that the second job offer was from a prosperous, growing company that also offered nice incentives such as generous 401(K) matching? I'm guessing that would only reinforce your decision.
If this simple analogy makes sense, congratulations -- you're already a step ahead of the yield-hungry crowd and that much closer to financial independence.
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If you haven't guessed, this exercise is one that investors face all the time: Do you choose the juicy (but static) 7% yield or the modest (but faster-growing) 3-4% payout?
How To Turn A 5% Yield Into 11%
The immediate gratification of a higher current yield can be tempting, no doubt. But as we saw in the scenario above, it pays to think ahead -- sustained dividend growth of 10% or better can ultimately put far more cash in your pocket over the long haul. Plus, buying stocks based strictly on current yield is a bit like judging books by their cover – usually unwise and often deceiving.
Instead, your time would be much better spent evaluating where future distributions are headed -- based on cash flow projections, payout ratios, capital expenditures and other key factors. After all, one quarter's dividend isn't nearly as important as the cumulative income that will be thrown off over the next five years.
Let's consider an example from my High-Yield Investing portfolio.
I first recommended Brookfield Infrastructure Partners (NYSE: BIP) in December 2011. At the time, the stock was trading at a split-adjusted $17.33 and offered a quarterly dividend of $0.233 per share ($0.93 annually) for a yield of 5.3%.
That was a decent payout -- but not in the market's upper echelon at the time. Many income investors likely skipped right past it without a second glance. But forward-looking investors saw a bright future unfolding.
Brookfield owned an eclectic mix of railways, marine terminals, electricity transmission lines and other infrastructure assets, most of which generated reliable fees under take-or-pay contracts (whereby customers paid a base rate to guarantee space, regardless of whether they used it). More important, management had budgeted $1 billion in capital for expansion projects over the next 24 months.
That money was reinvested into new assets (such as South American toll roads) that drove cash flows forward. And Brookfield's stated policy was to distribute 60% to 70% of its profits back to stockholders. As you can see, distributions have marched steadily higher over the years.
Thanks to years of steady growth, my subscribers and I are now collecting an income stream on our initial investment (or Yield-to-Cost) of 11.6%. Better still, the strengthening bottom line has more than doubled the share price to the current $43 – netting us a total return of 234%.
(See also: The Simple Math That Can Make You Rich)
Let's Find Tomorrow's High Yielders
With all this in mind, today's screen shines the spotlight on an elite group of stocks with the most impressive dividend growth trajectories. To make sure this growth streak remains intact, I eliminated those with weak earnings outlooks or dangerously high payout ratios.
Here are the finalists...
I think you can make an argument for all of the names on this list. I currently hold three of these stocks in my newsletter portfolios.
The quarterly distribution has already doubled to $0.68 from $0.34 and continues to rise. The latest increase was a hefty 24% bump to $0.77 per share. I'm confident this streak will continue.
TI is a premier semiconductor design and manufacturing company, primarily specializing in analog chips used in a wide variety of applications. The biggest sources of demand are the automotive and industrial fields, but the firm's products can be found in everything from smartphones to medical devices to aerospace equipment.
Thanks to manufacturing efficiencies, TI ranks in the 91st percentile in free cash flow (FCF) generation. Management typically aims to produce between 25 and 35 cents of FCF for every dollar of revenue. It met that goal and then some last year, generating $6.1 billion in free cash flow from $15.8 billion in revenues, a ratio of 38.6%.
And this shareholder-friendly business returns every last penny of cash flow to shareholders. That helps explain why distributions have increased for 15 consecutive years (at an impressive 20% compounded annual growth rate). And we're still in the very early innings of the internet of things (IoT) revolution, where billions of household and industrial devices are becoming internet-connected and reliant on analog sensors to process data.
This tailwind should keep dividends moving briskly forward.
Action to Take
As always, the stocks mentioned in this screen shouldn't be taken as final recommendations, but rather as a starting point for further research.
But as screens go, this one undoubtedly removes a lot of the guesswork. We know these are proven businesses generating ample cash flows and sharing generously with stockholders. That's true of most dividend growers – but these have all doubled (or more) their payouts since 2014.
I mentioned that my subscribers and I own a few of these names. But only High-Yield Investing subscribers will know if and when we add more of the stocks in this list to the portfolio... So if you're tired of settling for the paltry yields offered by most stocks -- and want to put yourself on the path to earning 11% yields like we do with Brookfield, then I urge you to read this report immediately.