Dividends With Earnings Growth

By Peter Cherewyk | April 19, 2010 AAA

Dividend-paying stocks need earnings sufficient enough to support paying investors, so finding companies with growing earnings per share over the last five years should give some insight into the sustainability and potential growth of future payouts. Beyond that, you should evaluate if the following stocks will give you the best return given your risk and time horizon. Payout ratios will let you know the percentage of earnings going out as dividends, but payout ratios fluctuate with quarterly earnings reports and thus cannot be used as a predictor of future dividend policies. These companies have a track record of growing earnings over the last five years, and they have solid dividends.

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Pharma and Biomedical

Company Dividend Yield Average EPS Growth 5 Years
AstraZeneca PLC (NYSE:AZN) 5% 18.7%
Bristol Myers Squibb (NYSE:BMY) 5% 7.5%
GlaxoSmithKline (NYSE:GSK) 4.9% 5.6%
Emergent Group (AMEX:LZR) 5.4% 51.6%
Merck & Co Inc. (NYSE:MRK) 4.2% 8.4%
Lilly Eli & Co (NYSE:LLY) 5.4% 11.7%

Astrazeneca is a biopharmaceutical company that markets and manufactures prescription medicines, and its revenues and earnings have been growing at a fast pace in recent years. The company's current ratio sits at 1.35, above the S&P 500 average, and cash flow from operating activities grew 34% from $8.7 billion in 2008 to $11.7 billion in 2009. Astrazeneca is set to report on April 29, 2010. (Look at stocks in a different sector, read Top Price-To-Book Picks.)

AZN Revenues (Millions)

2009 2008 2007
$32,804 $31,601 $29,559

AZN Diluted EPS

2009 2008 2007
$5.19 $4.20 $3.74

Healthcare
Healthcare stocks such as Bristol Myers Squibb (NYSE:BMY), GlaxoSmithKline (NYSE:GSK) and Merck & Co Inc. (NYSE:MRK) all report earnings over the next two weeks. The impact of the healthcare reform is still to be revealed, but Merck has dropped 12% over the last three months. All four except Emergent Group have seen over 25% increase in share price in the last year, so these stocks definitely have momentum on their side.

Bottom Line
Although all of these are dividend-paying stocks, they reside in the healthcare or pharma industry, which might not be the best sector in a bull market like the one we've seen over the last 52 weeks. Since last April the S&P 500 is up over 45%. Low beta stocks are not going to participate in the gains of a climbing market. On the other hand, a solid dividend and earnings to back it up might be just what you are looking for.

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