6 Debt-Free Dividend Growth Stocks

Logos debt-free dividend growth stocksOne of the very first posts I wrote on this blog was called A Brief History of My Debt. I thought if I was going to write about money online, I should at least show that I’ve been mostly responsible with spending and saving. Street cred, if you will. Little did I know, momentous debt payoff stories are way more compelling.

So many money testimonials start out with something like “I used to love shopping, and frivolously spent my entire paycheck on stuff that I thought made me happy. Then one day {insert serious event} happened and I finally realized that I was $XX,000 in debt and had to make a change”.

Not me. I’ve been free of consumer debt for a decade. The only big debt I ever had to pay off was a base model Toyota Echo that I bought with no money down in 2002 when I was broke after traveling (that car gave me nine solid years, and still had a resale value of $4,500 when I said goodbye).

I do have a mortgage on my house and investment property, so I’m not gonna go all Dave Ramsey on you. But I do believe there’s an allure to being completely debt-free by retirement, including the house. When I reach my retirement date, the mortgage will likely be gone one way or another, regardless of the never-ending debate around extra mortgage payments.

It’s safe to say I hold those that are 100% debt-free in high regard.

Therefore, when I see a company that is debt-free or nearly debt-free, I tend to favor it over others. For example, I bought Helmerich & Payne (HP) over other energy related stocks because of its strong balance sheet and only $81 million in debt paired with $251 million in cash. Compared to competitors Nabors (NBR) and Transocean (RIG), both of which carry many billions in debt, the decision was easy.

Buying low-debt or debt-free dividend growth stocks is certainly not a set in stone rule for me. But it’s a tendency that I believe lowers my overall portfolio risk. Companies without debt don’t go bankrupt, thus increasing the likelihood an income portfolio can withstand economic turmoil.

6 Debt-Free Dividend Growth Stocks For Further Consideration

This list was derived though analysis of the U.S Dividend CCC spreadsheet maintained by David Fish at dripinvesting.org. I filtered the data first by Debt/Equity, then by 5-year dividend growth rate (DGR), and confirmed via Yahoo Finance that the total debt was zero. Then I chose the six stocks that I thought were most interesting,  some being familiar names and others that were new to me.

This list is not a recommendation to buy or sell. As always, do your own research before committing capital to an investment. All data is sourced via Yahoo Finance and the CCC list.

Thor Industries (THO)

First up is Elkhart, IN based Thor Industries (THO) (I bought some). THO manufactures a wide range of towable and motorized recreational vehicles primarily for the North American markets. The company has a market capitalization of $3.28 billion with nearly $250 million of cash on hand and $0.00 debt.

The current forward P/E ratio (July 2016) is 13.73, while analysts estimate earnings will grow at a rate of 20% over the next five years. The price to earnings growth (PEG) ratio is quite attractive at 0.79 (typically anything under 1.0 is considered strong).

THO has a five-year dividend increase streak after holding it steady during the financial crisis. However, the streak is a bit misleading because the company has a habit of paying special dividends every few years including 2007, 2009, 2012 and 2013. Even with the freeze, the 10-year DGR is 25%.

The current dividend payout ratio is 28% and the yield is 1.70% vs. a five-year average yield of 1.60%.

I never thought I’d be interested in investing in a RV company. But this one is definitely captivating based on the numbers. I’m putting this on my further research list to learn more about their sales and growth strategy.

THO debt-free dividend growth stocks

Expeditors International of Washington (EXPD)

Next is Seattle, WA based Expeditors International of Washington (EXPD). EXPD is a global logistics, freight and supply chain management specialist. The company has a market capitalization of $8.90 billion with nearly $967 million of cash on hand and $0.00 debt.

The current forward P/E ratio (Dec 2016) is 19.65, while analysts estimate earnings will grow at a rate of 11.70% over the next five years. The PEG ratio is 1.86.

EXPD has a twenty-year track record of increasing the dividend. The company pays a semi-annual dividend which has been strictly consistent over that time period. The five-year and ten-year DGRs are 11% and 19.3% respectively.

The current dividend payout ratio is a low 33% and the stock currently yields 1.40% vs. a five-year average yield of 1.20%.

This low yielder may not be attractive to some investors, but the DGR and cash hoard help to make this company solid in an industry that is vulnerable to commodity price fluctuations.

EXPD debt-free dividend growth stocks

Visa (V)

I regret not buying this popular dividend growth stock pre-split when it was trading near $50 per share. In October last year, I guess I was too busy buying industrials like Parker Hannifin (PH) and United Technologies (UTX). But you gotta love the Visa (V) business model, legally salami slicing a percentage from millions of daily transactions.

This San Francisco based electronic payments company plays a huge part in the retail sales world. V is a behemoth with a market capitalization of $165 billion, $4.5 billion of cash on hand and $0.00 debt.

The current forward P/E ratio (Sept 2016) is 22.50 while analysts estimate earnings will grow at a rate of 18.08% over the next five years. The PEG ratio is 1.43.

V has a seven-year track record of increasing the dividend dating back to August of 2008. The five-year DGR is an impressive 30.7%

The current dividend payout ratio is very low at just 19% and the stock currently yields 0.70%, inline with its five-year average yield.

V is a quintessential Stage 3 – Low Yield, High Growth stock. It’s one that is hard to acquire at a low valuation, so when you get any kind of dip you have to hold your nose and buy. But if you can buy this stock and keep it for the long-haul, you’ll watch your income grow.

V debt-free dividend growth stocks

DSW Inc. (DSW)

Speaking of retail, here’s a company I’m quite familiar with but never considered as an investment until now. A store recently opened near my house and my wife hasn’t been so excited since Dunkin’ Donuts (DNKN) started serving bagels.

DSW Inc. (DSW) is a Columbus, OH based shoe and accessory retailer with a market capitalization of $3.38 billion, $230 million of cash on hand and $0.00 in debt.

As of March 26th, DSW operates 436 large stores in 42 states as well as DSW.com. The company believes it can operate 500-550 large format stores, and plans to open 15 to 20 store per year over the next five years. Further growth could come from smaller format stores and new merchandising in their current stores, increasing sales per square feet.

The current forward P/E ratio (Jan 2017) is 18.03 while analysts estimate earnings will grow at a rate of 15.00% over the next five years. The PEG ratio is 1.34.

DSW is brand new to the CCC list with a five-year track record of increasing the dividend. The three-year DGR is a whopping 71%, but remember, DSW has only been paying a dividend since 2011, so a large growth number will not be sustainable.

The current dividend payout ratio is a comfortable 44%, and the stock currently yields 2.20%.

DSW is a typical retail growth story, however, they are slowly increasing stores with cash available instead of using debt, similar to the strategies executed before them by Whole Foods (WFM) and Urban Outfitters (URBN).

WFM has plenty of room for more grocery stores. URBN diversified into other store concepts (Anthropologie, Free People, and BHDLN) to facilitate growth beyond core brand saturation. With a large format shoe warehouse, I don’t know what’s next. Before initiating a position, I’d need to learn more about where the growth strategy for DSW is headed after the first 550 large format stores are completed.

DSW debt-free dividend growth stocks

T. Rowe Price (TROW)

Of today’s list of six stocks, the only company I already own is T. Rowe Price (TROW). In March and early April this year, I acquired 40 shares after reading about the recent dividend increase and special dividend. That announcement opened my eyes to this champion of debt-free dividend growth stocks.

I received the special dividend of $2 per share on April 23rd and it was awesome. Didn’t even lift a finger!

TROW is a Baltimore, MD based asset management company, providing services to individuals and institutions. Its market capitalization stands at $21.46 billion with $1.9 billion of cash on the balance sheet and $0.00 in debt.

The current forward P/E ratio (Dec 2016) is 15.30, while analysts estimate earnings will grow at a rate of 12.22% over the next five years. The PEG ratio is 1.38.

TROW has a 29-year track record of increasing the dividend with a ten-year DGR of 16.6% (which doesn’t include the recent special dividend).

The current dividend payout ratio is at 38% and the stock currently yields a healthy 2.50%, favorably compared to its five-year average dividend yield of 2.0%.

With a loyal customer base, excellent profitability, and of course the clean balance sheet, I believe TROW is a solid opportunity out there in the financial services sector. I may add to my position on a downturn.

A similar company, Franklin Resources (BEN), is another on my radar. While not totally debt-free, they have plenty of cash fire power on the balance sheet, far outweighing the debt. Ryan over at My Dividend Growth has been writing some persuasive material on this stock recently.

TROW debt-free dividend growth stocks

MarketAxess Holdings (MKTX)

Lastly is a company called MarketAxess Holdings (MKTX). This New York City based company was founded in 2000 and operates an electronic bond trading platform. It has a market capitalization of $3.31 billion with $161 million of cash in the bank and $0.00 in debt.

The current forward P/E ratio (Dec 2016) is a lofty 31.89, while analysts estimate earnings will grow at a rate of 20% over the next five years. The PEG ratio is 1.79.

MKTX has a seven-year track record of increasing the dividend with three-year and five-year DGRs of 21% and 55.7% respectively.

The current dividend payout ratio is at 32% and the stock currently yields 0.90%, which does not compare favorably to its five-year average dividend yield of 1.1%.

This stock has run up 65% in the past 52-weeks, so that alone makes me somewhat disinterested in the short-term. I was surprised to see a low beta of 0.45 on this stock considering its high rate of growth. Being a New York based company in the financial services industry, it’s no surprise that the institutional holdings percentage is very high.

Since I’m not very familiar with corporate bond trading platforms, I’d be hesitant to invest in this company because of the difficulty in understanding the business model. The P/E ratio is also quite high, and the yield very low, both turning me off on this one. It’s more of a growth stock than a dividend growth stock story, in my view. That all said, it could be quite a compelling story if their earnings and market share continues to grow. With no debt and just seven years of dividend increases in the books, it could very well be on its way to being a Dividend Champion of the future.

MKTX debt-free dividend growth stocks

Concluding Thoughts

Remember the days when Apple (AAPL), Microsoft (MSFT), Oracle (ORCL) and other technology stocks were completely debt-free? The era of low interest rates has proven all too charming for even the most dominant and profitable of companies. The number of debt-free dividend growth stocks has surely decreased since the financial and mortgage crises of 2007-2009.

Hoards of analysts at companies like Apple that are collectively much smarter than I am, made the financial decisions to take on debt at fixed rates over long periods of time to free up money today. The opportunistic and conservative borrowers should reap the benefits over the coming decades.

But think about the companies that are strong enough, and stubborn enough to reject the temptation of low rates for all these years. These are well-run, cautious, and highly profitable companies that keep investors sleeping soundly at night.

The margin of safety that comes with being debt-free, the commitment to returning cash to shareholders, and increasing payouts year after year combine to make these no-debt dividend growth companies the types of stocks I want to build my future passive income streams on.

Upon reflection of my holdings, I could be doing better in terms of adding more debt-free companies to my portfolio. Exercises like this one are meant to give me ideas to base my future stock purchases on. I hope this helps you formulate a strategy too.

How much do you weigh debt levels in your stock selection process? What are some debt-free and low-debt stocks that you currently own or are considering?

Disclosure: Long TROW, WFM, AAPL, MSFT, PH, UTX

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12 Responses to 6 Debt-Free Dividend Growth Stocks

  1. FerdiS April 29, 2015 at 10:05 am #

    Very nice article — I wish we were debt free. We have little consumer debt but a large mortgage debt.

    In my stock selection criteria, I have debt/equity as one consideration. I prefer a ratio of less than 0.5. It is not a requirement, though. Perhaps it should be?

    Take care!
    FerdiS

    • Retire Before Dad April 29, 2015 at 10:35 am #

      FerdiS,
      Thanks for reading and commenting. Yes it would be nice to be completely debt free! I don’t use a specific D/E ratio because cash plays a roll in my thinking. When I see that debt goose egg, it signals discipline and mgt competency. Often the debt-free business model is deeply ingrained in the culture. While its a great time to borrow, I like these companies do not. There’s plenty more out there, and even more that are net debt-fee counting cash.
      -RBD

  2. Dividend Empire April 29, 2015 at 10:49 am #

    Great article. Definitely looking to add some TROW at some point. Another debt free company that I’m watching with decent growth prospects (although today’s earnings weren’t great) is Garmin (GRMN).

    • Retire Before Dad April 29, 2015 at 10:58 am #

      DE,
      Garmin did come up on my filter. However I ignored it because I think car GPS is a dying biz due to cellular tech. But I know nothing about the company otherwise. The numbers do look good at first glance, and a nice yield above 4%.

      Thanks for adding this one to the conversation. Is there’s a positive growth story on this one, I’m curious what’s driving it.
      -RBD

      • Dividend Empire April 29, 2015 at 11:22 am #

        Car GPS is definitely dying but they have diversified quite a bit lately. Most (70%) of their operating income is from aviation, fitness, marine, and outdoor products. I currently use a golfing GPS watch and a handheld backpacking GPS unit from Garmin. Both great products.

  3. Dividend Mantra April 29, 2015 at 1:22 pm #

    RBD,

    Nice choices up there. As a shareholder in both, V and TROW are my personal favorites. Just great stuff with both companies. 🙂

    I’m with you on debt-free stocks. Though I think leverage can provide better returns when it’s intelligently used, a flawless balance sheet gives a firm a lot more flexibility when things go south. I keep my personal leverage to a minimum, so I appreciate that when a company does the same.

    Cheers!

    • Retire Before Dad April 29, 2015 at 9:52 pm #

      DM,
      Well said about keeping your own personal leveraged to a minimum. When a company does the same, it’s almost sort of humbling. Using a lot of debt to fund business activities I think can be a bit arrogant, as in there’s a bunch of MBA’s running models that tell them to borrow more because that is smarter. I had a corporate finance class in college, and it was the worst finance course I ever took. Debt is fine until shit hits the fan (a la Lehman Brothers). It’s nice to know some companies don’t have to worry about the risk of bankruptcy.
      -RBD

  4. Ryan April 30, 2015 at 7:29 pm #

    Excellent article! There are some great names on this list which only proves the importance of a strong balance sheet. I’m liking the comments about how having no debt also allows the option of taking some on for rare opportunities or emergencies. I’m lucky not to have any debt, but I also don’t own a house so that’s unusual. I hope you do more of these sort of articles and thanks for the mention!

    • Retire Before Dad May 1, 2015 at 7:46 am #

      Thanks Ryan. That’s great you have no debt at all right now. Getting married etc will probably lead to a house at some point for you. I’m sure you’ll carefully plan that move out as houses can be a money sponge.

      I do a lot of filtering and sorting on the CCC list and I’ve been meaning to write something like this. This one made me realize that I could be better adding stocks with low to no debt.
      -RBD

  5. Pay Off My Rentals May 2, 2015 at 5:03 pm #

    I, too, thought this was an intriguing way to look at investment opportunities. Thanks for the diligence it took to prepare and write this post.

    I have one rental house to pay off and that will be it for my debt. My personal home is paid for and I have no consumer debt. I totally agree that that’s not just good for the average “Joe”, but for businesses as well. I sleep well at night with my nearly non-existent debt and would sleep well knowing my investments shared the same philosophy.

    Thanks again!

  6. Dividend Diplomats May 3, 2015 at 12:25 pm #

    Being debt-free is a great quality to have, even if some of the larger companies do not follow suit. You have no shackles and are free to do as you please with your money. I would say this is a huge plus for all the companies on the list. I was a little shocked that Thor was on the list considering the industry it is in. I expected others in service industries to be there, so it was interesting to see them on the list.

    I read this article and kept thinking to myself “Man, why don’t I own more of these companies?” I always wanted to own V but never found a great time to enter. I am starting to think it is one of those companies that I just need to suck it up and buy regardless of valuation. The company is in a great position for years to come considering how plastic oriented the retail industry has become.

    Thanks for putting this list together!

    Bert

  7. Feminine Assets May 16, 2015 at 11:24 am #

    I’ve never had Thor industries on my radar. I just assumed that they were hit as hard as the other RV manufacturers during the downturn. It really is quite amazing that they were able to make it through the great recession and emerge with no debt. I will definitely look into them more as well. Thanks for the article and keep up the good work.

    ~FA

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