The Importance of Dividends

I was reviewing my old files and re-visited an interesting paper from Standard & Poor's from a few years ago about the importance of dividends.

The paper states that dividends are important because:

1. They are a growing portion of personal income

2. More than one third of historical total returns came from dividends

3. Dividend paying stocks offer superior risk adjusted returns and potential for downside protection

I wanted to zoom in on this statement "Dividend paying stocks offer superior risk adjusted returns and potential for downside protection"

numerous academic studies have shown that dividend payers tend to outperform non-dividend payers across market cycles and offer higher risk-adjusted returns.

Dividends also play another important role during periods of volatility. While price returns can be either positive or negative, dividend incomes are by definition positive. Therefore, dividends provide investors with the opportunity to capture the upside potential while providing some level of downside protection in negative markets.

Fuller and Goldstein2 examined the return behavior of dividend paying and non-dividend paying firms in both up and down markets, from January 1970 to December 2007. The authors found that dividend paying firms outperformed non-dividend paying firms more in down markets than in up markets, with the results showing outperformance of 1% to 2% per month.

Dividends Act as a Cushion during Negative Equity Markets

Dividends also have lower volatility than Capital appreciation

The compounding effects of reinvesting dividends is undisputed.

You can read the full study here. 

Dividend investing is a widely discussed investment topic. The role of the paper was to add to the discussion by highlighting the role of dividends in generating returns. The beauty of dividend investing is that one can custom tailor their strategy to the outcome they are looking for. Some may focus on current income more so than dividend income growth, while others may want stable growth and income. The best way to embrace dividends is to identify your goals and objectives, your timeframce and risk preference, and design and implement a strategy to get you there.

Eight Dividend Growth Stocks Raising Distributions Last Week

I review the list of dividend increases every week as part of my monitoring process.

Dividend increases provide signaling value to me in my process of evaluating dividend growth companies. I believe it is an important tool in my toolset.

This exercise also helps me quickly review and scan large quantities of companies in order to narrow down the list to the most desirable candidates for further research.

I typically focus my attention on companeis that have managed to increase dividends for at least a decade.

Last week, there were 27 companies that increased dividends in the US. Eight of them have managed to increase dividends for at least a decade. The companies include:

CareTrust REIT, Inc.’s (CTRE) primary business consists of acquiring, financing, developing and owning real property to be leased to third-party tenants in the healthcare sector. 

The REIT raised its quarterly dividend by 15.52% to $0.34/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 24.85%.

The company managed to grow FFO from $0.94/share in 2015 to $1.50/share in 2024.

The company is expected to generate FFO/share of $1.78/share in 2025.

The stock sells for 16.10 times forward FFO and yields 4.68%.

Colgate-Palmolive Company (CL) manufactures and sells consumer products in the United States and internationally. It operates through two segments: Oral, Personal and Home Care; and Pet Nutrition.

The company raised its quarterly dividend by 4% to $0.52/share. This is the 62nd consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to increase dividends at an annualized rate of 3.38%.

The company managed to grow earnings from $1.53/share in 2015 to $3.53/share in 2024.

The company is expected to earn $3.71/share in 2025.

The stock sells for 24.35 times forward earnings and yields 2.30%.

Independent Bank Corp. (INDB) operates as the bank holding company for Rockland Trust Company that provides commercial banking products and services to individuals and small-to-medium sized businesses in the United States. 

The company raised its quarterly dividend by 3.51% to $0.59/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 9.17%.

The company managed to grow earnings from $2.51/share in 2015 to $4.52/share in 2024.

The company is expected to earn $5.43/share in 2025.

The stock sells for 11.62 times forward earnings and yields 2.32%.

JPMorgan Chase & Co. (JPM) operates as a financial services company worldwide. It operates through three segments: Consumer & Community Banking, Commercial & Investment Bank, and Asset & Wealth Management.

The company raised its quarterly dividend by 12% to $1.40/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 11.42%.

The company managed to grow earnings from $6.05/share in 2015 to $19.79/share in 2024.

The company is expected to earn $18.29/share in 2025.

The stock sells for 13.21 times forward earnings and yields 2.32%.

QUALCOMM Incorporated (QCOM) engages in the development and commercialization of foundational technologies for the wireless industry worldwide. It operates through three segments: Qualcomm CDMA Technologies, Qualcomm Technology Licensing, and Qualcomm Strategic Initiatives. 

The company raised its quarterly dividend by 4.71% to $0.89/share. This is the 23rd consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 7.60%.

The company managed to grow earnings from $3.26/share in 2015 to $9.09/share in 2024.

The company is expected to earn $11.73/share in 2025.

The stock sells for 13.36 times forward earnings and yields 2.27%.

Shoe Carnival, Inc. (SCVL) operates as a family footwear retailer in the United States. 

The company raised its quarterly dividend by 7.14% to $0.15/share. This is the 14th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 15.90%.

The company managed to grow earnings from $0.73/share in 2015 to $2.72/share in 2024.

The company is expected to earn $1.94/share in 2025.

The stock sells for 21.52 times forward earnings and yields 2.79%.

Southern Michigan Bancorp, Inc. (SOMC) operates as the bank holding company for Southern Michigan Bank & Trust that provides a range of commercial banking services to individuals, businesses, institutions, and governmental agencies primarily in the southwest Michigan communities. 

The company raised its quarterly dividend by 6.67% to $0.16/share. This is the 14th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 7.74%.

The company managed to grow earnings from $1.21/share in 2015 to $2.28/share in 2024.

The stock sells for 8.33 times earnings and yields 3.37%.

Williams-Sonoma, Inc. (WSM) operates as an omni-channel specialty retailer of various products for home.

The company raised its quarterly dividend by 15.79% to $0.59/share. This is the 20th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 12.73%.

The company managed to grow earnings from $1.71/share in 2015 to $8.91/share in 2024.

The company is expected to earn $8.53/share in 2025.

The stock sells for 19.19 times forward earnings and yields 1.61%.

Substance over Form

I tend to focus my attention on companies that regularly increase dividends to shareholders.

A long history of annual dividend increases is often the result of a strong business, with strong competitive advantages, with high return on investment, which tends to gush rising tides of free cash flows.

It's a symptom of a strong business.

However, that doesn't mean that every dividend increase is treated the same or that you should not look under the hood to understand the drivers behind that dividend increase.

I view dividend increases as signals, that indicate management's stance on the company, industry and economy. They simply are one aspect of my process.

A history of dividend increases will put a company on my map for sure. However, I do additional work from there to determine if a company is worth researching and even potentially adding to my portfolio.

That works includes reviewing trends in:

• Earnings Per Share or FCF/share
• Dividend Payout Ratios
• Growth in dividends per share
• Shares outstanding
• etc

I also try to put dividend growth in context.

A company that just initiated dividends would likely grow those dividends faster than earnings, especially as the dividend payout ratio is starting off on a low point. 

But a company that grows dividends faster than earnings and is not in the initial phase of dividend growth can only afford to do so through an increase in the dividend payout ratio. That has a natural limit to it.

A company that grows earnings and dividends at roughly similar rates is typically what you end up seeing. That being said, there could be some volatility in dividend growth rates from year to year, and also volatility in dividend payout ratios over periods of time.

In addition, I like to discuss the trade-offs between dividend yield and dividend growth in this context.

Namely there are three types of dividend growth stocks:

1. High Dividend Yields but low dividend growth 

2. Those in the Sweet Spot in terms of generating medium dividend yield and medium dividend growth

3. Low Dividend Yield but High Dividend Growth

Naturally, there are trade-offs between higher yields and lower yields, and higher expected growth versus lower expected growth. You also need to take into consideration the payout ratio, the maturity of the industry you are in, the type of business entity you are evaluating as well.

Nothing is a one size fits all approach.

I am mostly saying all of this because I see incorrect statements on the internet, presented as facts (I know, big surprise) that dividend investors are easily fooled by any dividend announcement or dividend increase or dividend streak. I've been doing this for close to 2 decades now, and I have not really seen this happen. Perhaps some novice investors do fall for this trap once or twice, but they learn from it. 

Dividend investors usually look under the hood when investing in a company, meaning they review fundamentals to determine dividend safety and potential for dividend growth, and try to acquire stocks at a good valuation.

This perspective of looking under the hood before you buy is also evident in dividend investors who buy ETF's too. They also look under the hood as well, in order to determine what they are getting themselves into. 

It is important to look under the hood, and try to evaluate the data using some simple logic. It's also important to avoid making a conclusion, without really looking at all the facts. 

Now I am sure there are some that just keep buying without doing any work, but from my experience, those would be a minority.

Most Dividend Growth Investors do tend to do quite a good amount of research, when screening for, researching companies, and building their portfolios. Then a lot of research goes into monitoring, learning and growing as well. They do focus their attention on the data, look under the hood, but most importantly focus on substance over form. 

Relevant Articles:

- Three stages of dividend growth

- Types of dividend growth stocks

- Rising Earnings – The Source of Future Dividend Growth

- How to read my stock analysis reports

Six Dividend Growth Stocks Raising Dividends Last Week

I review the list of dividend increases every week as part of my monitoring process.

Dividend increases provide signaling value to me in my process of evaluating dividend growth companies. I believe it is an important tool in my toolset.

This exercise also helps me quickly review and scan large quantities of companies in order to narrow down the list to the most desirable candidates for further research.

I typically focus my attention on companeis that have managed to increase dividends for at least a decade.

Last week, there were 23 companies that increased dividends in the US. Six of them have managed to increase dividends for at least a decade. The companies include:

DICK'S Sporting Goods, Inc. (DKS) operates as an omni-channel sporting goods retailer primarily in the United States. 

The company raised quarterly dividends by 10.20% to $1.2125/share. This is the 11th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 24.30%. 

The company managed to grow earnings from $2.87/share in 2015 to $14.48/share in 2024.

The company is expected to earn $14.47/share in 2025. 

The stock is selling for 12.90 times forward earnings and yields 2.49%.

Oracle Corporation (ORCL) offers products and services that address enterprise information technology environments worldwide. 

The company increased quarterly dividends by 25% to $0.50/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, Oracle has managed to increase dividends at an annualized rate of 12.79%.

Note that Oracle does not raise dividends every year, but nevertheless it's annual dividend has been increasing for 12 years in a row. Also note that the company seems like it cut dividends in 2013, but that's not the case. There was expectation for a tax hike on dividends in 2013, which is why a lot of good companies ended up pre-paying 2013 dividends in 2012.

The company managed to grow earnings from $2.26/share in 2015 to $3.81/share in 2024.

The company is expected to earn $6/share in 2025. 

The stock is selling for 24.60 times forward earnings and yields 1.35%.

Realty Income (O) is a real estate investment trust which invests in diversified commercial real estate. It has a portfolio of 15,450 properties in all 50 US states, the UK and six other countries in Europe.

Realty Income raised monthly dividends to $0.2685/share, which is a 4.47% increase over the dividend paid during the same time last year. Note that Realty Income raises dividends several times per year. This new dividend is 0.20% higher than the previous dividend they paid, but a cool 4.47% increase over the dividend paid during the same time last year.

Realty Income is a dividend aristocrat which has increased annual dividends since 1994. Over the past decade, the company has managed to grow dividends at an annualized rate of 3.60%. 

Between 2015 and 2024, Realty Income managed to growth FFO from $2.77/share to $4.02/share.

Realty Income is expected to generate $4.31/share in FFO in 2025.

The stock sells for 12.96 times forward earnings and yields 5.68%.

SpartanNash Company (SPTN) distributes and retails grocery products in the United States of America. It operates through two segments, Wholesale and Retail. 

The company raised quarterly dividends by 1.15% to $0.22/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 6.10%. 

The company is expected to earn $1.76/share in 2025. In comparison, it earned $1.67/share in 2015.

The stock is selling for 11.30 times forward earnings and yields 4.38%.

TE Connectivity plc (TEL) manufactures and sells connectivity and sensor solutions in Europe, the Middle East, Africa, the Asia–Pacific, and the Americas. The company operates through three segments: Transportation Solutions, Industrial Solutions, and Communications Solutions. 

The company increased quarterly dividends by 9.20% to $0.71/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 8.50%. 

The company managed to grow earnings from $5.98/share in 2015 to $10.40/share in 2024.

The company is expected to earn $8.08/share in 2025. 

The stock sells for 17.47 times forward earnings and yields 1.95%.

UDR, Inc. (UDR) is a multifamily real estate investment trust that focuses on managing, buying, selling, developing and redeveloping attractive real estate properties in targeted U.S. markets.

The REIT raised quarterly dividends by 2.38% to $0.43/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 5.26%. 

UDR managed to grow FFO from $1.68/share in 2015 to $2.30/share in 2024.

This REIT is expected generate $2.51/share in FFO in 2025. 

The stock sells for 16.96 times forward FFO and yields 3.97%.

Relevant Articles:

- Five Dividend Growth Stocks Raising Dividends Last Week

- Realty Income (O): A look at the past five years

- 19 Dividend Growth Stocks Raising Dividends for Shareholders

- Twenty Dividend Growth Stocks Raising Dividends Last Week

How I think about diversification

I am a big fan of diversification.

That doesn't just mean owning a lot of companies however.

It means spreading the risk.

You need to understand your risk profile, by analysing your assets, income, profile.

For most of us who weren't born with a silver spoon, our biggest asset is the ability to earn income. Where you earn that income, in what industry, and how you allocate any savings really matters.

For example, someone who owns a portfolio that's heavy on energy stocks, who works and lives in Houston, and works at a company in the energy sector is heavily concentrated on Energy.

This person risks enduring a lost decade like 2015 - 2025, where they are at a high risk of losing their primary source of income - their job.

All the while their investments do not do as well, plus their home may lose value as well.

Someone who works and lives in Silicon Valley, owns a portfolio that is tech heavy, and works at a technology company is heavily concentrated on Technology.

This person risks enduring a lost decade like 2000 - 2010, where they lose their primary source of income - their job.

Their investments also lose value at the same time, and probably their home value declines too.

Someone who works and lives in New York, who owns a portfolio that is heavily weighted towards financials, and works in the financial sector, is heavily concentrated on Financials.

This person risks enduring a financial crisis, like the one we saw in 2007 - 2009, which led to layoffs, share prices collapsing etc. You do not want to be heavily invested on the industry that generates your income.

You want to have some diversification in case things go wrong. Insurance is great to have when you really need it.

If you do not need it, the cost of insurance is really not that high in the grand scheme of things if everything goes right for you. 

Of course, there is a trade-off involved.

For example, if you go heavy on technology, you may end up really obscenely rich. Think stock options, bonuses, RSUs. Like those lucky employees of Nvidia. Winning the employment lottery must feel great, and must be life changing. However, the chances of winning the lottery as very slim, at best. It's good to be lucky, though it is far more likely that you are not. Hence, it may make a lot of sense to allocate a large portion of your money away from the sector that employs you, and invest it elsewhere.

If you went heavy on energy in the 1990s/early 2000s, you ended up doing very well, as your energy investments outperformed the market and you didn't suffer through the lost decade of early 2000s. I personally was a beneficiary of the energy boom, as this was one of the few sectors hiring after the Global Financial Crisis. It is good to be lucky, though it is far more likely that you are not. Hence, it may make a lot of sense to allocate a large portion of your money away from the sector that employs you, and invest it elsewhere.

In another example, if you went heavy on the financials in the 1990s and early 2000s, you may have made a ton of money as well. The Financial Sector can pay really well if you are good at your job, and your company does well. Think bonuses, stock, etc. It is good to be lucky, though it is far more likely that you are not. Hence, it may make a lot of sense to allocate a large portion of your money away from the sector that employs you, and invest it elsewhere.

What is the point of this post?

You need to think about your whole financial picture, and allocate funds accordingly, in order to spread the risk

You need to think about risks and rewards related to income and assets

Spreading the risk ensures that you can weather the storms that life throws at you

Those include layoffs, recessions, unemployment, health issues, family problems, retirement/education etc...

In order to take full advantage of the long-term compounding of equities, you need to be able to survive first, and then shovel as much capital as possible into investments to reach the desired FI crossover point.