A dividend growth strategy has proven to be an effective approach to investing for those with a long-term time horizon. The strategy is attractive to both conservative and opportunistic investors as it achieves long-term growth but with less volatility than the overall market.
Investing in dividend growth stocks can be as simple as investing in an ETF such as the Vanguard Dividend Appreciation ETF, but with 187 holdings in the fund, investors shouldn't expect market-crushing returns. This is evident in the 10-year returns of the fund which is essentially in line with the returns of the S&P 500. However, if investors narrow their focus, they may be able to find some long-term market beaters while maintaining protection during tough times. One company that stands out is Accenture Plc (NYSE: ACN)
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A reliable dividend payer
Accenture, a provider of professional services and solutions in strategy, consulting, digital, and technology currently pays an annual dividend of $2.42 per share, or 1.9% annualized. This is in line with the yield of the S&P 500, but as the case has been for the past 11 years, investors should expect the company to increase its payout over the next year. Over that period, Accenture has increased its annual dividend at an annualized rate of 7.2% per share. As the company has grown, the rate of increase has increased at an even faster clip, rising at an impressive 12.4% annualized rate over the past five years.
Understandably, safety and stability are important for dividend-seeking investors. Accenture delivers in this area too. Not only did the IT services consultant keep its dividend during the financial crisis, it increased it at a healthy clip, growing as much as 20% in the heart of the recession and 50% when coming out of it.
Room to grow
The fact that Accenture has consistently increased its dividend over the past two decades is a good indication that it prioritizes sharing its wealth with shareholders. However, to continue dividend increases, Accenture must also grow earnings. Furthermore, the company must leave enough wiggle room after paying the dividend to reinvest in the business, whether internally or through acquisitions. Accenture looks to be in good shape in both regards.
Accenture currently pays out approximately 44% of its earnings in dividends. The remainder is retained for a variety of reasons including shoring up the balance sheet and growing the business. A 44% payout ratio is closer to the top of the range Accenture has paid out over the last 10 years but still well below its peak. Additionally, the payout ratio is slightly inflated as the company incurred a non-recurring pension settlement charge of $509 million this past quarter. On a free cash flow basis, Accenture's payout is only 34%.
Accenture has been able to find a good balance between returning money back to shareholders and investing in the business. In addition to dividends paid, of the $4.6 billion generated in free cash flow, $2 billion were spent on net share repurchases while $1.3 billion were used on acquisitions, leaving $1 billion for other business needs. At a payout ratio of 34% of free cash flow, Accenture still has room to grow its dividend while growing its business at the same time.
Growing the "New" business
Dividends wouldn't be able to grow if revenue, earnings, and cash flow didn't also increase. With Wall Street analysts projecting 9.6% long-term earnings growth, Accenture shouldn't have any issue continuing its dividend growth streak.
Accenture management has focused its growth on a business segment it labels the "New", which is digital, cloud, and security services. In just one year, the "New", has gone from accounting for about 40% of Accenture's revenues to approximately half its business. By transitioning its services aggressively to emerging technologies, Accenture should be able to grow its business which will allow it to concurrently grow its dividend.
Like any common stock, dividend growth stocks are not immune to declines in a bear market. However, there is a good chance they will hold up better than the market. If that type of protection sounds appealing but you don't want to give up growth, Accenture may be the stock for you.
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