Last week, anywhere I checked on the internet, everyone was focused on stock market volatility. The fear is that we might be entering a new bear market. As a long term dividend investor I don’t really care much about things like that.
I care about selecting quality companies which can deliver results in any environment. I view declines in stock prices as opportunities to buy more shares at a discount.
The sad thing is that few managed to cover the news that Altria (MO) just raised its dividends. The company has been raising dividends for over 4 decades, and is still not done growing earnings and paying larger dividends to its shareholders. I find it impressive when a company can afford to be boring today, and just keep calm and carry on with its proven business model. As an investor, I like boring and predictable, particularly when I am paid in cash to hold on to that investment. Check my analysis of Altria for more details on the company.
Altria raised its quarterly dividend by 8.70% to 56.50 cents/share. This dividend champion has raised dividends for 46 years in a row. The ten year dividend growth rate is 11.60%/year. Given the fact that shares have been consistently undervalued over the past 60 years, the high dividend growth and the consistently high dividend yield, it is no surprise that Altria has been the best performing stock in the S&P 500 since 1957.
The company has managed to grow earnings per share from $1.48 in 2008 to $2.56 in 2014. Altria is expected to earn $2.81/share in 2015 and $3.05/share in 2016.
Many investors have prevented themselves from earning money in successful companies such as Altria, because of “ethical concerns”. Since I am in the investing business to make money, I choose not to have arbitrary ethical concerns on some areas, but ignore other ethical grey areas. I believe there isn’t a single company out there, which cannot be challenged on someone else’s ethical or moral grounds. This is why I do not use “ethical or moral” guidelines when investing – they are all relative. Plus, it would be arrogant to tell you that my ethical or moral beliefs are better than yours.
Analyzing Altria’s record requires a little more effort than other companies. This is because it essentially split itself into three companies between 2007 and 2008 – Altria, Phillip Morris International and Kraft. The shareholder from late 2006 ended up with growing dividend income each year, which was derived from three ( and later four) companies, rather than simply from the old Phillip Morris. If your dividend income is growing each year above the rate of inflation, it shouldn’t really matter if it is produced by the original company you purchased, or the subsequent four spin-off companies that were distributed to you from that original company.
Unfortunately, many databases show Altria as if it committed the cardinal sin of dividend growth investing - cutting dividends in 2007 and 2008. The biggest shame in this is when the robotic dividend aristocrat index removed Altria from the index in late 2007, because they viewed the decrease in dividends as if it were a dividend cut. This was a dumb move, which cost shareholders in those S&P Dividend Aristocrat ETF’s dearly. The stock has almost tripled since then. This is one of the reasons why I pick my own stocks, and don’t buy “computer generated lists” which do not take any effort to understand the companies themselves, and who also tell you that time spent analyzing companies doesn’t matter.
Luckily for those poor holders of the Dividend Aristocrat ETF, S&P didn’t repeat their mistake when Abbott split into two companies – Abbott Laboratories and Abbvie. At least they seem to be learning from their mistakes.
I believe that successful strategies could be designed, where investors will take advantage of such errors that automated computer investing programs make. In a world where everything is subject to increased automation, things that slip through the cracks could result in lucrative opportunities to the enterprising investor who has spent the time to train themselves to think. I will not share more at this stage.
Going back to Altria, the stock is selling at 19.30 times estimated earnings for 2015 and yields almost 4.20%. The payout ratio is at 80%, but this is sustainable for a company such as Altria, since it doesn’t need much capital to maintain operations. If I didn’t own a lot of Altria already, I would have been buying more. As they say, slow and steady does win the race. Give me a boring company like Altria, which is universally disliked by many, and then let me compound my capital for decades to come in a tax-sheltered account.
Full Disclosure: Long MO, ABT, ABBV, PM, MDLZ, KHC
- Comparing your results to S&P 500 could be dangerous to dividend investors
- How to become a successful dividend investor
- A Dividend Portfolio for Early Retirees
- The Value of Dividend Growth
- The Perfect Dividend Portfolio
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