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In this screen, we turned our attention to comparatively low-risk stocks that have good records for dividend growth. In addition, our selection criteria focused on those issues that our analysts project will continue providing investors with dividends that are likely to increase at above-average rates.

We began our search with stocks whose dividends have advanced at a compounded annual rate of at least 6% over the last five years. Similarly, we next narrowed the list to equities with projected annual dividend growth rates of at least 6% over the next three to five years. We also set a minimum estimated yield for the year ahead of 2.9%.

We then restricted our search to stocks with above-average ranks for both Safety (1 or 2) and Financial Strength (B++ or better), two of Value Line’s many proprietary ranks. Companies whose shares earn high marks for these metrics generally will fare better in volatile markets than the typical stock under our review. Lastly, to reduce the risk of underperformance, we limited the selection to issues ranked 3 (Average), or better, for Timeliness (i.e., relative price performance over the next six to 12 months), another proprietary Value Line measure.

The set of stocks that made the final cut are not only judged to be safer than most, but also possess proven and prospective dividend growth rates that are likely to exceed the average rate of inflation under the time periods chosen for this review. Consequently, the list will likely appeal to conservative investors in search of current income. We note that this group is comprised of a fairly wide range of companies, not just regulated utilities and financial institutions as per past dividend-focused screens. Not surprisingly, our list is dominated by large-cap industry leaders. Of the 28 names that made the list (see below) we have chosen to highlight, Northrop Grumman (NOC) and Occidental Petroleum (OXY).

Northrop Grumman

Northrop Grumman is a leading global security company that provides innovative systems, products, and solutions in unmanned systems, cybersecurity, C4ISR (command, control, communications, computers, intelligence, surveillance, and reconnaissance), logistics, and modernization to both government and commercial customers. The company’s revenues are comprised of both products and services, which are then separated into four segments: Aerospace Systems (38% as of March 31st), Electronic Systems (26%), Information Systems (25%), and Technical Services (11%).

This defense contractor’s primary customer is the U.S. Government, specifically the Department of Defense (DoD), yet its offerings also serve state, local, and foreign governments, among others. Given the company’s exposure to government spending, budget reductions in this challenging operating environment may continue to decrease the number of new contract awards (down 17%, year over year, in the first quarter), thus limiting top- and bottom-line growth. In fact, revenues have declined consecutively since 2010. However, Northrop managed to grow share-net in the March interim, despite these headwinds, due to cost cutting initiatives and program management.

On a positive note, Northrop may appeal to income-oriented investors due to its ability to return value to shareholders. In addition to its aggressive stock buyback program, its dividend yield is above the Value Line median. Indeed, the company has increased its annual payout every year since 2003, and considering past trends, we expect additional dividend hikes in the years to come. Dividend growth potential out to 2016-2018 is promising, as the dividend is projected to increase to $2.90 a share, indicating a 3- to 5-year growth rate of 6.5%.

Meanwhile, the stock’s total risk is of importance, as well. Shares of NOC hold our Highest Safety rank (1), reflecting its favorable Financial Strength ranking and Price Stability score. Moreover, the issue has a below-market Beta coefficient, signifying the stock’s low volatility.

Occidental Petroleum

Occidental Petroleum produces and markets crude oil, condensate, natural gas liquids (NGLs), and natural gas (Oil and Gas segment, 73% of net sales in the March interim); manufactures basic chemicals and vinyls through OxyChem (Chemical segment, 19%); and conducts various operations at its gas plants and pipelines, generates power, as well as markets and trades assets, such as commodities, transportation, and storage capacity (Midstream and Marketing segment, 8%).

Lower oil and NGL prices, as well as decreased production volumes from the Middle East/North Africa region has weighed on its recent performance. The chemical segment has suffered lately, too, due to sluggish demand for chlorinated organics and higher natural gas costs. That said, the oil producer’s domestic capital efficiency and operating cost reduction program, which is intended to improve its return on capital, should promote bottom-line growth. Indeed, management plans to reduce production costs below $12.84 per barrel of oil equivalent (boe). Although global economic uncertainties will likely persist going forward, the company’s long-term prospects appear promising. Management expects to see a steady increase in production and further capitalize on its expertise in enhancing output from mature fields and accessing hard-to-reach reserves.

Occidental Petroleum will likely intrigue income-minded investors for various reasons. To start, the company’s dividend yield is well above The Value Line Investment Survey average. What’s more, the dividend has increased for 11 consecutive years, denoting an 11-year compounded growth rate of 16% per year. Notably, the quarterly payout jumped 18.5% in the second quarter, and now rests at $0.64 a share. Looking ahead, the measure should continue its ascent. In fact, analyst Frederick L. Harris, III expects the dividend to reach $3.60 a share over the next three to five years, implying a 3.3% dividend yield. This is a projected growth rate of 11% over that time frame.
In addition to the issue’s Above-Average Safety rank, its Timeliness rank increased a notch, following our last report, to 3 (Average), indicating impressive price and earnings momentum of late. Moreover, the company’s favorable cash position, which has supported sizable dividend advances, and a relatively healthy balance sheet, gives the company high Financial Strength rating. Still, the company has a slightly above-market Beta (1.2).

 

 

Company Ticker Dividend Yield
Bank of Nova Scotia BNS.TO 4.36
Nat'l Bank of Canada NA.TO 4.69
Northeast Utilities NU 3.6
Royal Bank of Canada RY.TO 4.26
Vodafone Group ADR VOD 5.64
Air Products & Chem. APD 3.11
Brit. Amer Tobac. ADR BTI 4.32
CA, Inc. CA 3.57
Clorox Co. CLX 3.46
Gen'l Mills GIS 3.11
Harris Corp. HRS 3.1
Hasbro, Inc. HAS 3.48
Intel Corp. INTC 3.79
Johnson & Johnson JNJ 3.04
Lockheed Martin LMT 4.48
Mattel, Inc. MAT 3.21
NextEra Energy NEE 3.37
Northrop Grumman NOC 2.94
Occidental Petroleum OXY 3.05
Paychex, Inc. PAYX 3.63
Raytheon Co. RTN 3.38
Sempra Energy SRE 3.17
South Jersey Inds. SJI 3.25
TELUS Corporation T.TO 4.42
Teva Pharmac. ADR TEVA 3.36
Texas Instruments TXN 3.16
Toronto-Dominion TD.TO 3.91
Wisconsin Energy WEC 3.57
     

 

  

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.