The AMM Dividend Growth Portfolio is made up of three types of dividend-paying companies as we define them.
1. Dividend Stalwarts
The first type of dividend growth stock is what we call Dividend Stalwarts. Investors also call them Dividend Aristocrats and Dividend Kings. These are companies that pay a dividend and have been growing their dividend for the last 20, 30, 50+ years.
Dividend Stalwarts are dominant industry-leading companies. Their margins are high for their industry and their margins are stable. Dividend stalwarts generate high returns on invested capital and equity. Their capital structure, debt and equity, is stable and predictable too.
Dividend stalwarts are very profitable and generate excess cash flow that they return to their investors through share buybacks and increased dividends.
We’re not looking for the highest yielding stocks. We want a meaningful dividend yield, around 2-3%, and the ability to raise their dividend every year. Dividend Stalwarts are mature large companies so we’re looking for dividend growth in the high single digits, 6-9%. Occasionally they can increase their dividend by 10+%.
A couple examples of Dividend Stalwarts in the AMM Dividend Growth Portfolio are Pepsi (PEP) and Johnson & Johnson (JNJ).
2. New Dividend Payers
We classify New Dividend Payers as a company that initiated a new dividend policy within the last 5 years. Give or take a couple years.
While New Dividend Payers don’t have the history of paying and growing their dividend like a dividend stalwart, we think they have the ability to become a Dividend Stalwart.
Like the Dividend Stalwarts, new Dividend Payers are industry leaders, generate high returns on invested capital, and are very profitable. These traits will allow them to raise their dividend each year for the foreseeable future.
A big reason why we like New Dividend Payers is they tend to have higher dividend growth rates. New Dividend Payers start paying a dividend at a low payout ratio. Then as the company becomes comfortable with paying a dividend they will start to increase their payout ratio pushing their dividend growth rate up.
We expect New Dividend Payers to grow their dividends between 10-20% over the next few years.
A couple of examples of New Dividend Payers in the AMM Dividend Growth Portfolio are Apple (AAPL) and Starbucks (SBUX).
3. Special Situations
Special Situations are companies undergoing some form of restructuring usually a spin-off transaction. If we see value in the parent company or the upcoming spin-off and the pre-spin company pays a dividend then we will invest.
Our initial time frame for a Special Situation investment is around 1 year. But if after the spin-off, if one or both companies have the potential to become a Dividend Stalwart then we will stay invested.
A current holding that is a an example of a pre-spinoff investment is DowDuPont (DWDP) and an example of a completed spin-off that became a longer-term holding is Yum Brands (YUM).