In this podcast, Motley Fool analysts Matt Argersinger and Anthony Schiavone join host Mary Long to discuss:
- How a company enters into their “Dividend Seven.”
- If Home Depot can still be a growth stock.
- The metrics that dividend investors need to understand.
- Companies that have raised their dividend for decades.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our beginner’s guide to investing in stocks. A full transcript follows the video.
This video was recorded on Dec. 08, 2024.
Matt Argersinger: If you think about that, how many recessions, business cycles, wars, calamities happen over a 50 year period? And yet, here’s a company that’s raised its dividend every year.
Ricky Mulvey: I’m Ricky Mulvey and that’s Motley Fool senior analyst Matthew Argersinger. Look, dominant tech companies have their own category, the Magnificent Seven. You probably already know it. But on today’s show, Matthew Argersinger and Anthony Schiavone unveil their own group of seven the Dividend Seven, powerful companies that pay investors income. They joined Mary Long to discuss a big retailer that’s insulated itself from Amazon, a dominant financial company with $10.7 trillion in assets under management, and what it takes for a company to enter the Dividend Seven.
Mary Long: Matt and most listeners are likely already familiar with the Magnificent Seven, this basket of tech stocks that have dominated the market recently. But you two have come up with a different set of stocks. You’ve called it the Dividend Seven. What exactly is the criteria for making it into this group? How did you land on these requirements? There are seven of them. I’m correct.
Matt Argersinger: That’s right. Well, thank you, Mary. This was a fun exercise for us. We’ve seen, of course, the Magnificent Seven. Be this, I don’t know, this major force in the market that investors have just been magnetized to. We thought, well, we talk a lot about dividends. We do a dividend show here at the Motley Fool every other week, and we thought, a fun topic would be, could we we do our own version of the Magnificent Seven and layer in dividends and come up with this Dividend Seven or DIV seven group. The Magnificent Seven was our inspiration. And so I think that’s feeds into the seven criteria we use to select the stocks. We’ll start with the first one, which is just dominance. If we think about the Magnificent Seven, these are some of the most dominant companies, if not the most dominant companies in the world, if you think about, Amazon, Nvidia, Meta, Tesla.
We thought, OK, let’s start with that. Let’s only pick companies that we think are dominant. Of course, sizable. They have tremendous scale, and they have leadership in the markets that they serve and in most cases, they’re the leading number one market share company within that space. But then of course, since this is a Dividend Seven and not just a Magnificent Seven, we had to have some dividend criteria. The next three are dividend criteria. We have dividend growth, we wanted each of the companies to have grown their dividend by at least 100% over the last 10 years, so a doubling of their dividend. We wanted companies that were committed to a dividend. This is our third criteria, which is they had a sizable payout ratio. They were prioritizing the dividend in the way they allocate capital for the business. Then our fourth criteria was dividend yield. This is something, of course, investors are always looking for when they’re looking for dividend stocks. What is the stock yield? Well, we wanted yields that were at least 50% higher. Then the current yield on the S&P 500, which right now is around 1.2%. It’s near a historic low.
We were looking for a dividend yield of about 2% minimum for each of the companies that we were looking for. Then the fifth criteria we just wanted growth. In other words, we call it business growth, but we wanted confidence that this wasn’t a business that was stagnating. This was a business where revenue, earnings cash flow, we can see all that moving higher in the future. In other words, the business has tailwinds to it. The sixth criteria is financial strength, so strong balance sheet, cash flows that are robust that can withstand business cycles, a company that’s built to withstand unexpected circumstances or macroeconomic issues, things like that. Then the seventh and final criteria I’ve drone here bit was we’re looking for special. Is there something with this company or the set of companies that make them unique, make them stand out, make them visible in the minds of investors, consumers, beyond just them being a corporation in the US. Those were the seven criteria we used.
Mary Long: We got seven companies here today. We’re going to take a moment to spotlight each of them briefly. But before we get there, thinking about this group as a whole. There’s a push pull in dividend investing between yield and growth, a lot of times. Both are factors that you considered, obviously, when pulling this particular group together, as a whole, do you find that it favors growth over yield or vice versa? What’s the thinking behind that here?
Matt Argersinger: Yes, that’s I wouldn’t call it dilemma, but it is something that dividend investors in particular struggle with is do I buy companies that have big yields, yields of 3, 4, 5%? Or do I buy companies that are paying a dividend but might have a smaller yield, but are capable of growing their earnings and therefore, their dividend at a faster rate over time? The good news is with the seven companies we picked, it actually is quite balanced. The average dividend yield for the group is about 2.5%. Now, some investors might consider that low, but remember, the yield on the S&P 500 right now is 1.2%. It’s a historic low. This group on average is double that yield. I think that’s important. But at the same time, remember, because we were looking at companies that were growing their dividend or doubling their dividend over the last 10 years, you’re still getting a lot of growth here as well. I love the list because I think each of the companies, again, on average, has a pretty nice balance between yield and growth.
