Estimating future dividend growth is difficult if not impossible. Companies which might have had a long history of consistent double digit increases might stop raising dividends and might even cut them. It is easy to predict whether or not a company’s dividend is sustainable in the short run, by evaluating EPS trends, dividend payout ratios and cash flows. It is difficult to forecast however whether the dividend won’t be cut several years down the road.
Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree’s alternative incomes into a tailspin.
While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.
First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.
Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under. If the company is already spotting an unsustainable dividend payout ratio out of earnings, chances are that dividends are due for a cut.
Third, while sometimes companies fall on hard times, management could keep raising distributions. This could be due to management’s vision that this setback in company’s fortunes is temporary. In such cases it might be unwise to sell your position, as long as the dividend is at least maintained. If management keeps borrowing money however for over 2 years in a row in order to finance the dividend, this is a warning sign.
And last but not least, while a company might look as a great promising addition for your dividend portfolio, remember to diversify across sectors, yield/growth characteristics and even countries, in order to reduce your portfolio’s systemic risk. Investors who were heavily invested in the financial sector in 2007 and 2008 suffered huge drops in income; investors who held a more balanced mixture of stocks from a variety of industries suffered lower drops in dividend income.
I recently added to my positions in the following stocks, which have recently raised distributions, trade at attractive valuations and have a long history of dividend growth.
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company, which has rewarded shareholders with consistent dividend raises for 47 years, currently yields 3.20%. Using the ten year dividend growth rate for the company at 13.3%, yield on cost on an investment today would double almost every five and a half years on average. (analysis)
The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row, and currently yields 3.10%. Using the ten year dividend growth rate for the company at 10.7%, yield on cost on an investment today would double almost every seven years on average. (analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has raised dividends for 33 consecutive years and currently yields 3.90%. Using the ten year dividend growth rate for the company at 27.4%, yield on cost on an investment today would double every two and a half years on average. (analysis)
Emerson Electric Co. (EMR), is a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson, which currently yields 3.40%, has raised distributions for 52 years in a row. Using the ten year dividend growth rate for the company at 6.3%, yield on cost on an investment today would double every eleven and a half years on average. (analysis)
PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. Pepsi has raised distributions for 37 years in a row, and currently yields 2.90%. I would consider adding to my position there on dips below $60. Using the ten year dividend growth rate for the company at 12.8%, yield on cost on an investment today would double every five and a half years on average. (analysis)
Full Disclosure: Long JNJ, PG, MCD, EMR and PEP
- Should you sell after a dividend freeze?
- Yield on Cost Matters
- The Dividend Edge
- Dividend Investing vs Trading
One of my favorite books on investing is “ The Snowball: Warren Buffett and the Business of Life ” by Alice Schroeder. The book describes ho...
I view each investment I make as a seed that I plant for the long-term. Some seeds could turn into a tree that would provide fruit (dividen...
In my previous article, I discussed the concept of the dividend snowball as it applies to my dividend portfolio and dividend income. The po...
One of my largest holdings is McDonald’s (MCD). The company recently raised its quarterly dividend by 4.7% to 89 cents/share. McDonald's...
In a previous article, I discussed that I will reach Financial Independence some time in 2018 . After I reach the dividend crossover point ,...
In a previous article titled, My Dividend Retirement Plan , I outlined the concept of the dividend crossover point. This happens when your d...
One of the biggest mistakes I ever made was not maxing out my 401 (k), IRA and HSA accounts between 2007 and 2012. As a result, I ended up ...
As a dividend investor, my goal is build a portfolio that regularly grows dividend income. This ensures that my dividend income maintains it...
The more I learn and experience about investing, the more convinced I become that doing nothing is the best strategy for long-term success i...
I started my site dedicated to dividend investing in January 2008 . I had been able to accumulate some money for the first time in 2007, and...