Dividend Growth + Low Volatility: Three Stocks With These Market-Beating Attributes

As explained in Part One of this series, a mash up of the top 10 holdings in the Vanguard Dividend Appreciation ETF (VIG) and the PowerShares S&P 500 Low Volatility ETF (SPLV) turned up eight overlapping holdings.

McDonald’s (MCD) 3.2% dividend yield is the highest of the bunch. But it should come as no surprise that’s largely a function of a dividend that has grown over the past year, and a stock price that hasn’t, as seen in a stock chart.

MCD Chart

MCD data by YCharts

In terms of dividend growth, McDonald’s is no slouch, more than doubling the payout over the past five years. Lately though, satisfying shareholder’s dividend appetite has put pressure on the payout ratio, and the cash-payout ratio. A payout ratio in the vicinity of 50% isn’t cause for concern, but it is in the range where it begins to get harder to keep churning out a high rate of dividend growth.

In terms of valuation, McDonald’s 18 PE ratio -- well above the 14 market average -- is actually on the low end for restaurant stocks. Yum Brands (YUM) has a 19.9 PE ratio, Jack In the Box ‘s (JACK) PE ratio is at 22, and Domino’s Pizza (DPZ) has a 26 PE ratio. But there’s nothing about McDonald’s among our eight stocks that makes it a great deal-beyond the yield.

Among our already select group of low-volatility stocks with solid dividend growth, both Walmart (WMT) and IBM (IBM) deliver a more compelling mix of a good dividend story and even better valuation.

Walmart’s dividend has grown 98% in the past five years, yet its 23% payout ratio is less than half McDonald’s level. And its cash payout is also an incredibly low 30%. Yes, you get a solid dividend yield too: the 2.6% rate is more than a half a percentage point more than what a 10-year Treasury pays these days.

Walmart’s stock took a big hit in the fourth quarter, as concerns about how Washington would change tax policy -- and how that might impact consumer spending -- weighed heavily on the shares. Once that was resolved at the start of the year, Walmart has pretty much kept pace with the market, rising 5.5% compared to the 6.1% gain for the S&P 500.

Meanwhile, its PE ratio remains near its recession level.

WMT PE Ratio TTM Chart

WMT PE Ratio TTM data by YCharts

Not bad for a stock whose 68% total return over the past five years exceeds the 36% gain for the S&P 500.

IBM also sets up nicely. The dividend has grown 70% over the past five years, and with payout ratios below 25% there’s no question IBM can keep the hikes coming if it wants. A near 14% dividend boost last year suggests management is going to keep delivering on that front. Meanwhile, the stock trades at a 14 PE ratio.

The one “problem” with IBM is a sub-par 1.6% dividend yield. But as explained in a Part One of this series, shareholders have been getting a less direct payment, as IBM has been aggressively buying back shares ever since the recession, thereby increasing the ownership stake for holders of the remaining stock. Its total shareholder yield (dividend yield plus reduction in shares outstanding) is nearly 6%.

There’s been a lot of hand wringing lately about companies announcing buyback plans-with the stock market trading at or near record highs. IBM has been at this a long-time.

IBM Stock Buybacks TTM Chart

IBM Stock Buybacks TTM data by YCharts

The recent downtick in its buyback program is encouraging, given that IBM seems to have pared back a bit just as the valuation got pricier.

That said, IBM is by no means expensive. A 14 PE ratio over the trailing 12 months is in line with the market average, and its 12.5 forward PE ratio is slightly below the estimate for the S&P 500.

Warren Buffett's Berkshire Hathaway (BRK.B) owns four of the eight stocks that made our short-list of strong dividend growth coupled with low volatility. IBM was the only one of the four stocks that Berkshire added to in the fourth quarter. Just saying.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.



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