Best Dividend Growth Stocks With Low Payout Ratios

I recently ran a screen to find the best dividend growth stocks with low payout ratios. Payout ratios are very important for dividend growth investors because it can give us a sense of the company’s ability to cover their dividend. And more importantly, if the payout ratio is very low, it typically means that the company has a lot of room to grow their dividend in the future. This is what all dividend growth investors want – annual pay raises.

The payout ratio is definitely not the only thing we should look at when evaluating a potential dividend growth stock.  The company still needs to have a good track record of paying dividends, it should have a decent current yield (though this is not critical if the dividend growth is exceptional), strong earnings growth and finally the stock should be fairly valued.  To find stocks that fit all of these conditions I applied the following filters to the CCC list maintained by David Fish:

  1. Greater than 5 years of continuous dividend increases (all stocks on the CCC list pass this filter)
  2. Less than 33% payout ratio (dividends per share / earnings per share, I will also provide free cash flow data below)
  3. Current yield greater than 2%
  4. PE ratio less than 20
  5. 5-year annual dividend growth rate greater than 10%
  6. Estimated 5-year earnings growth greater than 5%
  7. No financial / insurance companies since these represented the bulk of the results

After applying these filters I was left with 10 stocks that span several different sectors.  Some are very popular dividend growth stocks and others were rather surprising to me.  Please keep in mind that these are just the results of the screen and are in no way a recommendation to buy any stocks mentioned.  The purpose of this post is to provide a nice starting point for further research.

Here are the results of my screen (data from 5/11/2015), sorted by payout ratio.

1. Magna International (MGA)

  • Sector: Services
  • Industry: Auto parts
  • EPS payout %: 20.2
  • FCF payout %: 35
  • Dividend increase streak: 6 years
  • Current yield: 1.55%*
  • PE ratio: 13
  • 5-year annual dividend growth rate: 76%
  • Estimated 5-year earnings growth rate: 15%

Magna International is a leading automotive supplier with locations in 29 countries.  MGA’s yield dropped significantly about a week ago when the stock price jumped.  This popped up on my screen because the CCC list was updated prior to this event.  I still included MGA in the screen results because the rest of the numbers are intriguing.  I will definitely research this one further.

2. Valero Energy Corp (VLO)

  • Sector: Energy
  • Industry: Oil & Gas Refining and Marketing
  • EPS payout %: 22.9
  • FCF payout %: 26.6
  • Dividend increase streak: 5 years
  • Current yield: 2.75%
  • PE ratio: 8
  • 5-year annual dividend growth rate: 13.9%
  • Estimated 5-year earnings growth rate: 5%

Valero Energy Corp is an international manufacturer and marketer of transportation fuels, petrochemical products and power.  VLO most recently increased their dividend from $0.275 to $0.40, a 45% dividend increase!

3. Canadian Natural Resources (CNQ)

  • Sector: Energy
  • Industry: Independent Oil & Gas
  • EPS payout %: 27.3
  • FCF payout %: Negative FCF
  • Dividend increase streak: 14 years
  • Current yield: 2.41%
  • PE ratio: 10.6
  • 5-year annual dividend growth rate: 33.8%
  • Estimated 5-year earnings growth rate: 16%

Canadian Natural Resources is one of the largest independent crude oil and natural gas producers in the world.  Their 5-year dividend growth rate is outstanding and they have been increasing dividends multiple times per year recently.  Free cash flow was negative in 2014 and will be in 2015 as well mostly due to large property purchases.

4. Macquarie Infrastructure Company (MIC)

  • Sector: Services
  • Industry: Air Services
  • EPS payout %: 28
  • FCF payout %: 144
  • Dividend increase streak: 5 years
  • Current yield: 5.1%
  • PE ratio: 6.5
  • 5-year annual dividend growth rate: 85% (3-year)
  • Estimated 5-year earnings growth rate: 7%

Macquarie Infrastructure Company owns, operates and invests in a diversified group of infrastructure businesses in the United States.  I made an exception here with the annual dividend growth rate since the 5-year data was not available on the CCC list.  The FCF payout % seems very high but their FCF is increasing and they have had a lot of investment activities over the past couple of years.  I will need to look into it further.

5. Corning Inc (GLW)

  • Sector: Technology
  • Industry: Hardware
  • EPS payout %: 28.4
  • FCF payout %: 24.1
  • Dividend increase streak: 5 years
  • Current yield: 2.25%
  • PE ratio: 12
  • 5-year annual dividend growth rate: 14.9%
  • Estimated 5-year earnings growth rate: 11%

Corning is one of the world’s leading innovators in materials science. Corning specializes in specialty glass, ceramics, and optical physics to develop products that have created new industries and transformed people’s lives.  As a research scientist in drug development, I use Corning products on a daily basis in the lab – and so does everyone else in my field.  This looks like a solid company that I will definitely research in depth.

6. Harley-Davidson Inc (HOG)

  • Sector: Goods
  • Industry: Recreational Vehicles
  • EPS payout %: 31.6
  • FCF payout %: 28.2
  • Dividend increase streak: 5 years
  • Current yield: 2.18%
  • PE ratio: 14.5
  • 5-year annual dividend growth rate: 22.4%
  • Estimated 5-year earnings growth rate: 12%

Harley-Davidson needs no introduction.  While I’m a sports bike enthusiast myself, there certainly is a large demand for hogs.  Although the current yield is a bit low, HOG’s dividend and earnings growth look great.

7. Gap Inc (GPS)

  • Sector: Services
  • Industry: Apparel Stores
  • EPS payout %: 32.1
  • FCF payout %: 27.1
  • Dividend increase streak: 11 years
  • Current yield: 2.31%  *Update – GPS stock price dropped on 5/12, new yield = 2.4%
  • PE ratio: 13.9
  • 5-year annual dividend growth rate: 20.4%
  • Estimated 5-year earnings growth rate: 10%

Gap Inc. is a leading global specialty retailer with a strong portfolio of brands.  Although the expected 2016 earnings growth doesn’t look so hot, neither does the industry average.  Growth is expected to pick up after 2016 with an average annual growth rate of 10%.  With a PE lower than it’s peers and a recent price drop GPS could be a good buy right now.

8. Reliance Steel & Aluminum (RS)

  • Sector: Materials
  • Industry: Steel & Iron
  • EPS payout %: 32.6
  • FCF payout %: 42.6
  • Dividend increase streak: 5 years
  • Current yield: 2.41%
  • PE ratio: 13.5
  • 5-year annual dividend growth rate: 28.5%
  • Estimated 5-year earnings growth rate: 10%

Reliance Steel and Aluminum Co. is a Fortune 500 company and the largest metals service center corporation in North America.  RS appears to be very undervalued right now with a PE of 13.5 compared to the industry average of 23.7.  The projected earnings growth looks very sporadic though; with 2015 at 1.4%, 2016 at 16.4%, 2017 up to 39% and then back down to 3.7% for 2018.  I will have to look into why they don’t expect consistent earnings growth and if this will impact their ability to increase dividends in the future.

9. Archer Daniels Midland (ADM)

  • Sector: Goods
  • Industry: Farm Products
  • EPS payout %: 32.7
  • FCF payout %: 14.8
  • Dividend increase streak: 40 years
  • Current yield: 2.17%
  • PE ratio: 13.6
  • 5-year annual dividend growth rate: 11.4%
  • Estimated 5-year earnings growth rate: 7%

Archer Daniels Midland Company is one of the largest agricultural processors in the world.  Based on the numbers above ADM seems like a great addition to a dividend growth portfolio.  I won’t bother giving even a brief analysis on ADM because FerdiS at DivGro posted a great write-up recently titled “Stock Analysis: Archer Daniels Midland.”

10. International Business Machines (IBM)

  • Sector: Technology
  • Industry: Information Technology Services
  • EPS payout %: 33
  • FCF payout %: 33.8
  • Dividend increase streak: 20 years
  • Current yield: 3.04%
  • PE ratio: 10.9
  • 5-year annual dividend growth rate: 14.6%
  • Estimated 5-year earnings growth rate: 5%

International Business Machines is a multinational technology and consulting corporation.  IBM recently raised their dividend 18% from $1.10 to $1.30 per quarter.  Even after a recent jump in stock price IBM still offers a 3% dividend yield, not bad for a tech company.  IBM’s growth rate is a bit slow but it’s worth looking at in detail.  I might have researched IBM a bit more aggressively if I wasn’t so overweight in tech.

That’s it!  This is just one of many ways to find some of the best dividend growth stocks.  This screen was focused on financially healthy companies with low payout ratios and high dividend growth rates, which in combination are good indicators that a company will continue to increase their dividend payout.  It is always important to look at other factors like debt, competition, barriers to entry, etc but these factors are beyond the scope of this analysis.  These 10 stocks should serve as a good starting point for myself and others to do proper due diligence.

Out of the 10 stocks on this list, I like MGA, GLW, GPS and ADM the best and will research them in detail.

What are your thoughts on this list and screening method?


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14 Responses

  1. Dividend Empire,
    Thanks for researching and posting this list. I will keep it in mind when I make my next few purchases. These are all great companies with bright futures. Although, I like ADM the most out of the list. Great post..

    • Ken Ken says:

      You’re welcome LOMD. Hope it helps. I love doing these excercises from time to time in order to put some fresh stocks on my watch list. I’m really excited about Corning – I think it’s a great buy right now.

  2. DivHut says:

    I’m liking ADM from the list above. I added some about two weeks ago as a new position in my portfolio along with DOV. Both offer a decent yield and great long term sustainable dividends at reasonable valuations. Sometimes I like to look elsewhere for my dividend income. It seems that energy plays have run their course somewhat as well as many financial stocks too. Thanks for sharing.

  3. B says:

    Hi Ken

    Great lists there above.

    The thing I have concerns about dividend stocks that have low payout ratio is that they are not dividend stocks in the first place and are more geared towards a growth stock. I don’t know how you see about that but other than that some of the big names out there has proven years to show what they are capable of.

    • Ken Ken says:

      Thanks for the comment B. I appreciate the feedback and I’m curious to know your definition of a dividend growth stock, as I’m relatively new to this type of investing. All of the companies in this list have increased dividends for at least 5 years with excellent dividend growth rates. To me this shows a decent amount of commitment by the company to grow their dividend. Additionally, I view a low payout ratio as a potential opportunity for the company to comfortably grow the dividend further.

      That said, my portfolio mostly consists of traditional dividend growth stocks with very long track records of increases. Some of the companies mentioned in this list don’t have a long track record but wouldn’t it be great to get in on a few companies when they are just starting out on their journey to become dividend champions?

  4. Nice list, DE.
    Thanks for running the screener and profiling these stocks.
    I own two from this list (ADM and MGA)…will have a look at some of the other ones.


  5. Nice list. Thanks for sharing.

  6. Great list here Ken! Thanks for taking the time to run the screener and put it together. You included one of my recent favorite stocks/additions to my portfolio here: ADM. Market leader, great dividend growth rate, and a low payout ratio to continue this growth. I initiated a strong position for my portfolio last month and couldn’t be happier. I am also a shareholder of IBM, so I have nothing but great things to say about Big Blue!

    Hopefully you enjoyed your Memorial Day Weekend. Again, thanks for putting this together!

    Bert, One of the Dividend Diplomats

    • Dividend Empire Dividend Empire says:

      Hi Bert

      Thanks for stopping by! ADM and IBM are both excellent stocks to own. I’m hoping to add both of them very soon.

      I spent the entire weekend hanging out with my little boy. Doesn’t get much better than that. Hope you had a great weekend as well.


  7. Howie says:

    Hi Ken,

    Great info as usual. What software did you use to do the filtering? I use TD Ameritrade ThinkorSwim platform for my options/stock trading, but I’m looking for a nice filter tool like you used.


    Howie King

    • Dividend Empire Dividend Empire says:

      Thanks Howie. I actually just downloaded the CCC list and used excel to filter the data for this article. I’ve recently started using and as screeners too. You should check them out – they both have a ton of filters available to put into your screen.

      Take care,


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