4 Non-Cyclical Growth Stocks Increasing Dividends

By Kristina Zucchi, CFA | January 13, 2011 AAA

Companies are finding ways to spend the enormously high level of cash on their balance sheets and one of the most common uses is to pay out dividends. In the fourth quarter of 2010 there was a 44% increase in companies raising dividends over a year ago. Although less than half of public companies payout dividends, those that do are expected to payout more than 8% higher this year as compared to last year.

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While this is good news for investors, there is an assumption about the company that pays dividends that attracts a certain type of investor. These companies are assumed to be in the no growth to decline phase of the life cycle or a cyclical company that has been at the high point of the cycle. Utility and commodity companies respectively fall into these two buckets. As a result, finding a non-cyclical company which is expected to experience growth over the next three to five years that is also increasing its dividend may be more difficult to find. But these companies do exist!

1. Ecolab Inc (NYSE:ECL)
This company develops, manufactures and services products that clean, sanitize and promote food safety and infection prevention. ECL serves customers in approximately 160 countries across both developed and emerging markets, especially in the all important Asia Pacific region. Ecolab is expected to grow over 12% in 2011 and over 13% in each of the next five years. Ecolab has paid a cash dividend for over 74 years and in December announced that it had increased its quarterly cash dividend by 13%.

2. Walt Disney Co. (NYSE:DIS)
The conglomerate entertainment company operates media networks, parks and resorts, studios, consumer products and interactive media segments. The company's diversified holdings create a perceived safe environment for the stock, but also a perceived ceiling on performance. Despite its diversified holdings and long history, the company continues to show mid-teens growth which depends on new content developed and released as well as macro-economic conditions. Analysts expect close to 18% growth this year and over 11% growth in each of the next five years. Disney delivers a 17% payout with a dividend yield of 1%.

3. AT&T (NYSE:T)
The telecommunications products and services giant and its sector have completed the transition away from landlines and reached a new normal growth rate. This is largely due to the high penetration of cellular in the developed world and growth in the developing markets. The new normal growth rate for AT&T is high single digits, with analysts expecting 8% growth this year and 9.6% next year with mid-single digit growth expected each year over the next five years. As a result of AT&T reaching this steady state, it pays out nearly 45% of earnings - one of the highest yields among Dow stocks at 5.9%.

4. Deere & Co. (NYSE:DE)
The manufacturer of agriculture and forestry equipment is a heavy industrial late cycle company. While there is a cyclical nature to the business due to the replacement cycle of these machines, the growth rate of the company is expected to be mid to high double digits this year and next (around 17%) and almost 10% per annum over the next five years. The company recently raised its quarterly dividend by over 17%, bringing its yield to 1.7%. Deere currently has a payout ratio of 27%.

The Bottom Line
Finding stocks with healthy and increasing payout ratios that are growing at a steady rate should provide returns that exceed the current bond yields and provide strong performance to a portfolio. With so many companies' balance sheets in strong cash positions, the penchant for increasing dividends should continue. (For additional stock analysis, see Top Earning Canadian CEOs.)

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