High Quality + High Yield + High Growth Stocks
Lowell Miller is known for investing in high-quality growth stocks with high and growing dividends. Miller argues that high-yielding stocks have performed well after past bear markets, especially ones induced by a recession. Even in the current environment, 1,700 firms raised their dividend last year. This issue’s First Cut looks for stocks that follow the quantitative screen presented in Miller’s book “The Single Best Investment: Creating Wealth With Dividend Growth” (2006; www.mhinvest.com).
Miller starts out by looking for firms with low debt, strong cash flow, and strong overall credit-worthiness. As a measure of financial leverage, companies with a debt-to-capital ratio of 50% or lower made the First Cut [capital consists of debt plus equity]. To help judge the likeliness of continued dividend payments, Miller looks for a payout ratio [dividends divided by earnings] below 60%, or 85% for utilities. All First Cut companies were also required to have cash flow three times the level of their indicated dividend. Dividends cannot be paid until all cash obligations are satisfied, so Miller recommends an interest coverage ratio [EBITDA divided by interest] of four, or two for utilities.
Miller feels that dividend growth is critical. At a minimum, dividend growth should exceed the rate of inflation. Dividends are paid from the income stream, so earnings must also be expected to expand. The First Cut firms have a dividend growth rate of at least 4%, while the historical and expected earnings growth rate is at least 5%.
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