Investors love dividend stocks, especially when they increase their payouts consistently over time. But when you’re looking at top dividend growth stocks, it’s essential to look beyond simple percentage increases in quarterly payments to put a dividend increase into context. All too often, big dividend growth results from undesirably low starting quarterly payouts, and even a big increase won’t necessarily boost the stock’s yield to levels that would make it interesting to most dividend investors. With that in mind, let’s take a look at three stocks that will show up on this year’s lists of top dividend growth stocks — but arguably shouldn’t be there.
Bank of America
Megabank Bank of America (BAC) enjoyed one of the biggest dividend increases of any stock this year, with its quarterly payout jumping a whopping 400 percent. At first, the dividend rise appeared to be in doubt, as the bank said that its initial submission to the Federal Reserve seeking permission for the payout boost had accounting errors that required Bank of America to resubmit a new capital plan a few months later. But Bank of America eventually implemented its new payout, much to the satisfaction of impatient shareholders who’d endured tiny dividends for far too long.
Yet before you focus too much on the 400 percent increase, it’s important to realize that Bank of America only raised its quarterly dividend from a penny per share to a nickel per share. Even after the boost, Bank of America’s yield is only a bit above 1 percent, well below that of banking rivals Wells Fargo (WFC) and JPMorgan Chase (JPM). Investors will have to see another major increase in Bank of America’s dividend before they’re ready to sound the all-clear and trust the sustainability of its future payout.
Danaher (DHR) isn’t a well-known name to many investors, but the conglomerate has a number of different businesses, including environmental testing equipment, dental health care diagnostic products, industrial automation equipment and enterprise security solutions. In February, the company announced it would quadruple its quarterly dividend payout.
Even with the 300 percent boost, though, Danaher only pays 10 cents per share to its shareholders, which equates to an annual yield of just 0.5 percent. Given that the company will likely make between $3.50 and $4 per share in profits this year and next, even the new annualized dividend rate of 40 cents per share is just a tiny sliver of Danaher’s available capital. The conglomerate could do a lot more to convince dividend investors of its good faith by implementing even more considerable dividend hikes next year and beyond.
Cement and construction-aggregates producer Vulcan Materials (VMC) wins the race for the best dividend increase of the year, as the company made two separate boosts. One of them quintupled Vulcan’s former payout, while the second added another 20 percent kicker on top of the previous raise. With home construction activity starting to rebound more strongly, times looked good enough for Vulcan to consider the shareholder-friendly move.
Pushing its dividend from 1 cent to 6 cents per share makes for an impressive 500 percent growth rate, but the yield on the stock remains a rock-bottom 0.35 percent. In Vulcan’s defense, the company had to endure a long period of poor industry conditions that sapped its profitability, and so Vulcan’s hesitation to overcommit to returning shareholder capital is understandable. Nevertheless, if conditions remain favorable, investors should demand further dividend hikes from Vulcan in the near future.
Dividend increases are always good news for shareholders, but it’s important not to exaggerate the importance of any given hike based solely on a percentage rate. Simply by keeping in mind the base against which you measure dividend growth, you’ll make sure you don’t make bad conclusions about a particular dividend stock.
Motley Fool contributor Dan Caplinger likes high yields and dividend growth. You can follow him on Twitter @DanCaplinger or on Google+. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase and Wells Fargo. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.