As part of my portfolio management process, I scan the list of dividend increases every week. I use this list in order to monitor dividend increases from companies I own, and also monitor the rate of dividend growth from companies I have on my watchlist.
Dividend payments on US stocks have been much more stable than capital gains over the past 70 years. Dividend payments from a diversified portfolio are more stable and more reliable than prices, which is why I have chosen to live off dividend income in retirement. I cannot tell you whether PepsiCo will sell for $50/share or for $150/share in 2016. However, I am reasonably certain that it will pay four dividends in 2016 for a total of $2.96/share. I want to avoid schemes where I have to dip into principal or slowly liquidate my portfolio in retirement and hope that I don’t outlive my shrinking asset base. Ironically, asset depletion strategies such as the four percent rule were tested using historical data where average dividend yields were around 4%, and dividend payments were either flat or rising 90% of the time. I say ironic, because the four percent rule effectively proved that living off dividends in retirement is a sustainable way to pensionize your nest egg in retirement. This is why my retirement plan focuses on the stable and growing cash dividend payments, and ignores stock price fluctuations.
In the past week, there were three companies in which I have a position, which rewarded their patient shareholders with a dividend raise. Those companies include:
PepsiCo, Inc. (PEP) operates as a food and beverage company worldwide. PepsiCo announced a 7.1 percent increase in its annualized dividend to $3.01 per share from $2.81 per share, effective with the dividend expected to be paid in June 2016. This dividend champion is increasing its quarterly dividend for the 44th consecutive year. In the past decade, PepsiCo has managed to increase its annual dividend by 10.90%/year. The stock is slightly overvalued at 20.90 times expected earnings, and yields 3.05%. The company would be more appealing below $92 - $94/share. Check my analysis of PepsiCo.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. The company operates through three segments: Beverage Concentrates, Packaged Beverages, and Latin America Beverages. The company raised its quarterly dividend by 10.40% to 53 cents/share. This marked the company's 6th consecutive annual dividend increase. In the past 5 years, Dr Pepper Snapple has managed to increase its annual dividend by 18.30%/year. The stock is overvalued at 22.90 times expected earnings, and yields 2.30%. I would consider the shares below $80/share.
Kimberly-Clark Corporation (KMB), together with its subsidiaries, manufactures and markets personal care, consumer tissue, and K-C professional products worldwide. It operates through three segments: Personal Care, Consumer Tissue, and K-C Professional. The company raised its quarterly dividend by 4.50% to 92 cents/share. This marked the company's 44th consecutive annual dividend increase. In the past decade, Kimberly-Clark has managed to increase its annual dividend by 7.60%/year. The stock is slightly overvalued at 21.10 times expected earnings, and yields 2.90%. Given the slow growth of earnings per share over the past decade, and the payout ratio from today, and the high valuation, I would not consider adding to the stock at current levels. I would consider holding my existing positions for the time being however.
United Parcel Service, Inc. (UPS), a package delivery company, provides transportation, logistics, and financial services in the United States and internationally. It operates in three segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. The company raised its quarterly dividend by 6.80% to 78 cents/share. This marked the company's 7th consecutive annual dividend increase. In the past decade, United Parcel Service has managed to increase its annual dividend by 8.30%/year. The stock looks attractively valued at 16.80 times expected earnings, and yields 3.30%. One of the reasons why I haven’t analyzed the company before is due to the fact that earnings per share have been largely flat over the past decade.
L-3 Communications Holdings, Inc. (LLL), through its subsidiary, L-3 Communications Corporation, provides intelligence, surveillance, and reconnaissance (ISR) systems; aircraft sustainment; and simulation and training products and services in the United States and internationally. The company operates in four segments: Electronic Systems, Aerospace Systems, Communication Systems, and National Security Solutions. The company raised its quarterly dividend by 7.70% to 70 cents/share. This marked the company's 13th consecutive annual dividend increase. In the past decade, L-3 Communications has managed to increase its annual dividend by 18.40%/year. Such a high rate of dividend growth is possible for companies in the first phase of dividend growth, which are starting out from a low base. The company also spends three to four times as much on stock buybacks, as it spends on dividends. The stock looks attractively valued at 15.30 times forward earnings and yields 2.40%. The dividend is well covered by earnings today. I have observed defense contractors for several years, but never really taken the plunge in a big way, due to the fact that they are largely dependent on a single customer for the majority of their revenues. After observing historical trends, I have noticed a lot of dividend cuts in the industry from a historical perspective, which means that the industry in general should not be very well represented in my long term dividend portfolio. As a mostly passive investor, I do not want to have too many companies that I really have to monitor a lot. That being said, the company may be appealing to enterprising investors below $112/share.
Compass Minerals International, Inc. (CMP) produces and markets salt, sulfate of potash specialty fertilizer (SOP), plant micronutrients, and magnesium chloride primarily in North America and the United Kingdom. The company raised its quarterly dividend by 5.30% to 69.50 cents/share. This marked the company's 13th consecutive annual dividend increase. In the past decade, Compass Minerals has managed to increase its annual dividend by 9.10%/year. The stock looks attractively valued at 16.20 times forward earnings and yields 4%. I need to put this stock on my list for further research, though the forward payout ratio of 65% is a little bit more than what I would want it to be.
Hasbro, Inc. (HAS), together with its subsidiaries, provides children’s and family leisure time products and services worldwide. The toy maker raised its quarterly dividends by 10.90% to 51 cents/share. This marked the company's 13th consecutive annual dividend increase. In the past decade, Hasbro has managed to increase its annual dividend by 18.60%/year. The stock looks attractive at 17.90 times forward earnings and an yield of 2.80%. I have not been a fan of the toy industry in general, due to short product lifecycles, unpredictability of new games revenues, shifts in consumer demands for toy products etc. However, Hasbro has an impressive track record from the past decade, which merits adding it to my list for further research.
Reynolds American Inc. (RAI), through its subsidiaries, manufactures and sells cigarettes and other tobacco products in the United States. It operates through RJR Tobacco, American Snuff, and Santa Fe segments. The company raised its quarterly dividend by 16.70% to 42 cents/share. This was the second dividend increase in the past year. The new dividend is 25.40% higher than the payment from the same time last year. The new dividend is much higher than the 15.625 cents/share paid in the first quarter of 2006. Reynolds American has managed to raise annual dividends for twelve years in a row. The stock is slightly overvalued at 20.60 times expected earnings. It yields 3.50% and has a forward payout ratio of 72%. This is a sustainable payout for a tobacco company. Given my high exposure to tobacco through Altria and Phillip Morris International, I am hesitant to initiate a position in Reynolds American. I am sure that its shareholders could do well over time, as long as the economics of the tobacco business do not change for the worse.
Full Disclosure: Long PEP, DPS, KMB, MO, PM
- How to read my weekly dividend increase reports
- How I Manage to Monitor So Many Companies
- Dividend income is more stable than capital gains
- The Four Percent Rule is Dependent on Dividend Yields
- Four Percent Rule for Dividend Investing in Retirement
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