Friday, March 18, 2016

How can companies increase annual dividends by hiking them every two years?

One of the best things to come out of writing this site for the past 8 years is the ability to connect with others who may share similar goals and interests with me. The best part is questions I receive from readers. Many times, those questions provide fuel for future blog posts or turn into blog posts themselves. My biggest problem is that if everyone of my readers were to ask me a question per day, I would end up with enough blog content to last for the next 20 – 30 years.

A reader asked me the following question, after reading my post on slowing dividend growth:

"I was wondering how a company could have 53 consecutive annual dividend increase and yet go close to 30 months between raises? ( as is the case with CL between 83 and 84, among other dates as well)"

This is a good question. The best way to answer it, is to look at actual data. Actually, breaking down the data could be helpful. Most companies in the US pay dividends every quarter, with some exceptions. Therefore, the typical dividend growth company such as Colgate-Palmolive (CL) would pay dividends four times per year.


Most companies on the dividend champion lists tend to announce increases in their dividends once per year, which usually happens during the same time each year. A company like Colgate-Palmolive does not need to increase dividends every single year however. If they time their increases correctly, they could manage to announce hikes in the quarterly payments once every two years, and still have annual dividend payments go up.

Let’s look at an actual example below: (source: Colgate-Palmolive)

1999                          Declared          Ex-Date            Record Date          Payable      Dividend Per Share
1st Quarter
01/14/99
01/22/99
01/26/99
02/16/99
0.06875
2nd Quarter
03/11/99
04/22/99
04/26/99
05/17/99
0.06875
3rd Quarter
07/08/99
07/22/99
07/26/99
08/16/99
0.07875
4th Quarter
10/14/99
10/22/99
10/26/99
11/15/99
0.07875
1998
1st Quarter
01/08/98
01/23/98
01/27/98
02/17/98
0.06875
2nd Quarter
03/05/98
04/23/98
04/27/98
05/15/98
0.06875
3rd Quarter
07/09/98
07/23/98
07/27/98
08/17/98
0.06875
4th Quarter
10/08/98
10/23/98
10/27/98
11/16/98
0.06875
1997
1st Quarter
01/09/97
01/23/97
01/27/97
02/17/97
0.05875
2nd Quarter
03/06/97
04/23/97
04/25/97
05/15/97
0.06875
3rd Quarter
07/10/97
07/23/97
07/25/97
08/15/97
0.06875
4th Quarter
10/09/97
10/23/97
10/27/97
11/17/97
0.06875
1996
1st Quarter
01/11/96
01/23/96
01/25/96
02/15/96
0.05875
2nd Quarter
03/14/96
04/23/96
04/25/96
05/15/96
0.05875
3rd Quarter
07/11/96
07/23/96
07/25/96
08/15/96
0.05875
4th Quarter
10/10/96
10/23/96
10/25/96
11/15/96
0.05875

This table above shows the quarterly dividend payments for 1996 – 1999. You can see that Colgate-Palmolive has maintained a pretty consistent schedule of paying out dividends to shareholders in the middle of every February, May, August and November. This is why I say that dividend payments are more stable and predictable than capital gains, and therefore it is easier to model as an income source for my retirement.

You can see that the quarterly dividend in 1996 was 5.875 cents/share. The company sent four payments of 5.875 cents/share for a total of 23.50 cent/share for 1996.

You can see that in 1997, the company raised its quarterly dividends to 6.875 cents/share from 5.875 cents/share that was payable in May 1997. Because of the timing of the dividend hike however, the company ended up sending only three dividend payments at the new rate of 6.875 cents/share. In essence, there was one payment at the old rate of 5.875 cents/share and three payments at the new rate of 6.875 cents/share. The total dividends paid per a share of Colgate-Palmolive stock in 1997 amounted to 26.50 cents. That’s a 12.77% increase over the annual dividends paid in 1996.

In 1998, Colgate-Palmolive kept its quarterly dividend unchanged at 6.875 cents/share. As expected, shareholders received this payment every February, May, August and November. The company paid out a total of 27.50 cents/share in dividends to its shareholders. That’s a 3.77% increase over the annual dividends paid in 1997.

Colgate-Palmolive sent shareholders a payment of 6.875 cents/share in February and May of 1999. This payment was unchanged, and had been unchanged for 8 quarters in a row. However, the company decided to hike dividends to 7.875 cents/share for the August and November dividend payments. As a result, the company ended up paying of a total of 29.50 cents/share in annual dividends to its shareholders in 1999. That’s a 7.27% increase over the annual dividend paid in 1998.

As you can see from the examples above, the company raised its quarterly dividend every two years, and still managed to grow the annual dividend. As dividend investors, we do care about seeing our annual income growing over time. The faster the raises, the better of course. It is much better to get raises after four quarters, rather than after eight. That doesn’t invalidate the fact however, that shareholders of Colgate-Palmolive have received a growing annual dividend per share for over 53 years in a row.

After reviewing the dividend history of Colgate-Palmolive, you can see that the company ultimately started to raise dividends once per year in 2005. Before that, it managed to increase dividends every 8 quarters. The company still managed to grow annual dividends to shareholders due to the timing the dividend raises.

Full Disclosure: Long CL

Relevant Articles:

Dividend income is more stable than capital gains
Dividend Champions - The Best List for Dividend Investors
Five Dividend Growth Investing Lessons I Have Learned Over the Years
What should I do about slowing dividend growth?
Eight Years Dividend Growth Investor

12 comments:

  1. Companies that don't increase their payout every single year, but show yearly dividend growth also tend to show a lower dividend growth rate. This article nicely explains why one shouldn't buy just on one metric. One should dig into the numbers and understand how that growth and other relevant areas occur in the company.

    Thanks for putting this work into your blog DGI.

    David T

    ReplyDelete
    Replies
    1. Hi David,

      This is a very good point. Digging into the numbers is very important.

      DGI

      Delete
  2. Thank you! This was useful... I had been wondering myself.

    ReplyDelete
  3. This was a really good point to pick up. Backpacking on Truijen's comment - it just further drives home the point that in order to truly trust the metric, you have to understand what's behind the metric. If something sounds too good to be true, it usually is!

    -Dividend Reaper

    ReplyDelete
  4. Good explanation. Now the red in Daves spreadsheet makes sense.

    ReplyDelete
  5. Many thanks for your explanation DGI, it's very clear.

    ReplyDelete
  6. That makes total sense now. Thanks for the article.

    ReplyDelete

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