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How to Find Growing Dividends

Money tree 2There’s an exclusive list of companies in the USA called the ‘Dividend Aristocrats’. These stocks made the blue-blooded list by having the distinction of increasing their dividends every year for at least 25 consecutive years.

Annual dividend hikes are like increasing pay checks – I know I wouldn’t turn them down! And lest you think a 5-10% yearly dividend increase is chump change, over the years, they do add up significantly thanks to the power of compounding. As an example, an investor who bought shares of Coca-Cola in 1988 at a 4% dividend yield would be getting close to a 50% dividend yield now.

So, dividend increases are attractive and important. But, just what is it that allows these companies to fund dividend increases, and how can we look for such companies here in Singapore? To find out a little more, I looked at two companies within the Aristocrats list that had the fastest dividend growth rates over the past 10 years – fast-food restaurant chain McDonald’s (NYSE: MCD) and steel producer Nucor Corp (NYSE: NUE). Macdonald’s dividends grew 28.4% per year while Nucor’s dividends had 22.6% annual increases.

And instead of looking at their Income Statement, I turned to their Cash Flow Statement and found this:



It’s The Cash

Businesses generate and pay out cash from their daily operations and that’s tracked by the Cash Flow Statement.

Free cash flow (FCF) is what’s left over after cash has been used from the business’s generated cash flow to purchase assets to maintain its current competitive position. It can be used to shore up the business’s financial position, repurchase shares, grow the business and pay dividends among other things. Here’s a simple formula for it:

Free Cash Flow = Cash Flow from Operations – Capital Expenditures

The graphs of the two American companies also show how growing FCF can help fund growing dividends. Nucor’s FCF has declined quite a fair bit from 2006 onwards, but the previous growth has helped to generate some cash cushion for the company to aid in paying dividends even when times are tougher – that’s the beauty of a company with solid and growing free cash flow.

The Local Cases

There’s no list of dividend royalty here in Singapore, but we do have companies with 10 years of unbroken dividend increases. One of them’s conglomerate holding company, Jardine Matheson Holdings (SGX: J36). The company has holdings in various Singapore-listed companies, including retailer Dairy Farm International (SGX: D01) and fellow conglomerate Jardine Strategic Holdings. Let’s take a look at Jardine Matheson’s dividend and FCF history:

Jardine Matheson

Here, we see ample FCF coming from Jardine Matheson’s daily business operations, which the company is able to return part of it to shareholders as dividends. Dividends from the company have grown from US$0.5 per share in 2006 to US$1.35 per share.

Another with a nice track record of dividend increases since 2008 is the vehicle and commercial inspection and testing company, Vicom (SGX: V01).  Again, we see that the company’s businesses generate growing FCF that management can return to shareholders in the form of climbing dividends.


Share Price PE Ratio Dividend Yield
Jardine Matheson Holdings US$64.95 25.8 1.35%
Vicom S$5.13 17.1 2.9%

Foolish Bottom Line

Companies with high dividend yields might be highly sought after, especially in a low interest rate environment like Singapore. But to hunt for companies that can grow dividends slowly but surely, investors have to look at the right places. It is important to focus on the cash flow statement. Ultimately, cash is the lifeblood of a business and without cash flow, dividends can’t be paid. Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.