Dividend Growth Investor Newsletter

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Thursday, May 20, 2021

Is Forecasting Futile?

Warren Buffett has a lot of insightful quotes about pretty much any investment situation you could think about. One of them covers forecasting. 

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

I recently saw a chart, which showed the future forecasts for the Federal Funds rate. These are based on futures contracts traded on Futures Exchanges. 


As you can see from the chart, these forecasts are often very wrong, and very off base. Which is why you should always take forecasts with a huge grain of salt.

If you look at the analyst estimates for S&P 500 earnings over the past 25 years, you can see that estimates are off quite often. They usually start as being too optimistic, until they gradually decrease to the a lower amount. It is fascinating to observe that in only five out of 25 years did estimates on S&P 500 earnings actually turn out to be more conservative than reality ( a positive surprise).

For 20 out of 25 years in question, the analysts were too optimistic and actual earnings were lower than forecasted ( negative surprise).


The point is that you should always take anyone's opinion or estimates with a grain of salt (mine too). Usually, doing your own research should provide you with enough conviction to pursue your investment strategy, and ignore the noise. Having a proper risk management process is very important, because no-one is right 100% of the time. Hence, it is important to lose little when you are wrong, but maximize profits when you are right.

In my investing, I try to focus on major trends and themes, which have an underlying logic behind them. For example, I agree with Peter Lynch that if you spend more than 13 minutes per year worrying about macroeconomic indicators such as interest rates, you have wasted 10 minutes. 

Instead, I try to focus on individual businesses that have certain characteristics such as moats, brands and intangibles that keep their competitors at bay. Some of these businesses also serve basic human needs, which means that demand for them is less cyclical and more recurring in nature, which bodes well for revenues, earnings and dividends. I am pretty confident that people would eat junk food, drink alcohol, smoke, fight wars, wash hands, brush teeth, wipe, use spices, use cosmetics, car for their pets, make trash, pay for phones, pay for medicine etc

On the other hand, I don't think that even the person in charge of the Federal Reserve has a clue about where rates would be three months from now.

I’ve had this idea for a while, but may also have been inspired by this investor, “ Eat them, drink them, smoke them portfolio”.  

So, you're going up to New York and do that fancy book learning?" And I said, "Yes sir."

He responds by saying, "You don't need any of that. I'll tell you everything you need to know in one sentence."
I started thinking to myself "alright, here it comes.”

He says, "Eat 'em, drink 'em, smoke 'em, go to the doctor, and look good when you get there."

I just looked at him, so he says, "Alright, I know you're a little slow so I'll repeat it. Eat ‘em - Your food
companies. Drink 'em - Your beverage companies (soda, milk, juice, beer, hard alcohol). Smoke 'em - Your tobacco companies. Doctor - Your healthcare companies.

He pauses for a second and says, "You're engaged aren't you. Let me tell you something about your future bride." I started thinking to myself you've never met my fiancĂ©e. He says, "She's going to allow the house to burn down around her before she goes out in public without her hair and nails being done. So that's my last category; cosmetics, beauty supplies.

Then he said, "Listen, if you invest in those categories, you're never going to be the most popular kid at the cocktail party. But you're also not going to blow up your clients.”
In a way, my strategy for investing is expecting that people would be people, and they will stick to their behaviors over time.

It also means identifying riding long-term trends and sticking to them for as long as they remain in tact. This is how a rising dividend payment after several years in a row helps me identify a trend that I can invest in, and I stay invested for as long as it is ongoing ( the dividend is rising and not being cut). I do not know how long a trend would continue for, but I do know to hold on for as long as possible. That way I do not make predictions, but ride long term trends as they are ongoing.

Monday, May 17, 2021

Six Dividend Growth Stocks Rewarding Shareholders With Raises

As part of my review process, I monitor the list of dividend increases every week. I use several different resources to come up with a list of dividend increases for the week. I then narrow the list down to include only these companies that have a minimum streak of annual dividend increases. In this case, I focus on companies that raised dividends for at least a decade.

There were six dividend growth stocks that raised dividends last week. The companies that increased dividends over the past week include:

Union Pacific Corporation (UNP) engages in the railroad business in the United States.

The company raised its quarterly dividend by 10.30% to $1.07/share. This dividend achiever has increased annual dividends to shareholder for 15 years in a row. Over the past decade, the company has managed to boost dividends at an annualized rate of 20.50%.

Between 2011 and 2020, the company grew earnings from $3.36/share to $7.88/share.

The company is expected to earn $9.58/share in 2021.

The stock sells for 23.51 times forward earnings and yields 1.90%.

J & J Snack Foods Corp. (JJSF) manufactures, markets, and distributes various nutritional snack foods and beverages to the food service and retail supermarket industries in the United States, Mexico, and Canada. It operates in three segments: Food Service, Retail Supermarkets, and Frozen Beverages.

The company raised its quarterly dividend by 10.10% to 63.30 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. During the past decade, the company managed to raised dividends at an annualized rate of 18.30%.

Earnings increased from $2.93/share in 2011 to $0.96/share in 2020.

The company is expected to earn $2.43/share in 2021. 

The stock is selling for 69.82 times forward earnings and yields 1.50%.

IDEX Corporation (IEX) operates as an applied solutions company worldwide.

The company raised its quarterly dividend by 8% to 50 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, IDEX has managed to increase dividends at an annualized rate of 13.40%.

The company raised earnings from $2.32/share in 2011 to $4.94/share in 2020.

The company is expected to earn $6.21/share in 2021.

The stock is selling for 35.97 times forward earnings and yields 0.97%.

HNI Corporation (HNI) manufactures and sells workplace furnishings and residential building products in the United States, Canada, China, Hong Kong, India, Mexico, Dubai, Taiwan, and Singapore.

The company increased its quarterly dividend by 1.60% to 31 cents/share. This marked the 11th year of annual dividends increasing for this dividend achiever. Over the past decade, the company has managed to boost distributions at an annualized rate of 3.60%.

Earnings per share went from $1.01 in 2011 to $0.98 to 2020.

The company is expected to earn $2.26/share in 2021.

The stock is selling for 19.57 times forward earnings and yields 2.81%.

First Merchants Corporation (FRME) operates as the financial holding company for First Merchants Bank that provides community banking services.

The company raised its quarterly dividend by 11.50% to 29 cents/share. This is the tenth year of consecutive annual dividend increases for this newly minted dividend contender. . During the past decade, it managed to boost dividends at an annualized rate of 38.50%. The bank did cut dividends during the Global Financial Crisis.

Earnings increased from 34 cents/share in 2011 to $2.74/share in 2020.

The company is expected to earn $3.60/share in 2021.

The stock is selling for 13 times forward earnings and yields 2.48%.

Alerus Financial Corporation (ALRS) provides various financial services to businesses and consumers. 

The company increased its quarterly dividend by 6.70% to 16 cents/share. This marked the 23rd year of consecutive annual dividend increases for this dividend achiever. During the past decade, it managed to boost dividends at an annualized rate of 7.50%.

The company grew earnings from $0.80/share in 2011 to $2.52/share in 2020.

The company is expected to earn $2.26/share in 2021.

The stock is selling for 14 times forward earnings and yields 2.03%.

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This is not an automatic list to buy of course. I would review each company, and determine if it makes sense from a fundamentals point of view. This would include reviewing trends in earnings, dividends, payout ratios, revenues, and gaining an understand of the company's business model.

The job is not done just by reviewing fundamentals however. The investor also needs to come up with a conclusion whether the stock is fairly valued at the moment. If it is not, then the investor may come up with a price at which the security may be attractive.

The other thing to consider is that valuation is relative. When evaluating companies, we compare them to other companies with promising fundamental and valuation characteristics. Then, we strive to pick the company or companies with the best values in the investors opportunity set.

While this sounds like a lot of work on the surface, with practice, it becomes almost a second nature.

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Wednesday, May 12, 2021

A Look Under the Hood For Inflation

I recently saw a chart from AEI, which broke down inflation into a few components between 1997 and 2017. 

You can see that prices increased on average by 55.60% between 1997 and 2017.


Source: AEI

This picture provides an interesting perspective, because not every item you would buy actually increased at the pace of inflation that is widely quoted. 

Certain items that are more labor intensive, which cannot be easily automated ended up increasing much faster than the pace of inflation. Those include healthcare, education and childcare – all very labor intensive occupations, which require some skill and are difficult to automate well. There are other issues around healthcare and education, notably the persistent demand for these services, as well as the opaque nature of the industry ( eyeing healthcare, and the way it is “broken” in the US essentially).

On the other hand, items like TV have declined in price. That’s because it is easier to automate TV production.

This is a fascinating chart to look at, because it explains to a certain degree why some folks “feel’ that inflation is higher than reported. It is very likely that the composition of your annual expenses will determine whether you experience high inflation or a low inflation. If all you spend money on is TV’s, your cost of living has declined substantially over the past 20 years. However, if you are like one of the millions who need quality healthcare, you have likely seen a large spike in your costs over the past 20 years.

It’s fascinating to think that your personal basket of goods and services will definitely impact your lifestyle cost over time. For example, for most Americans the cost of daycare and college is high, but covers only a few years ( around 4 in each, give or take). There is a clear end in sight to when your child would graduate college for example ( in most cases). It also makes planning for retirement that much more challenging, because it entails forecasting expenses that are not a major component of your inflation basket today. 

Owning productive assets such as equities provided a very good inflation hedge over the past 20 years. I used S&P 500 as a proxy for a diversified dividend growth portfolio, since data on S&P 500 is readily available. 

Year

Earnings Per Share

Dividends Per Share

Price

1995

33.96

13.79

615.93

1996

38.73

14.90

740.74

1997

39.72

15.49

970.43

1998

37.71

16.20

1229.23

1999

48.17

16.69

1469.25

2000

50.00

16.27

1320.28

2001

24.69

15.74

1148.08

2002

27.59

16.08

879.82

2003

48.86

17.39

1111.92

2004

58.50

19.44

1211.92

2005

69.93

22.22

1248.29

2006

81.51

24.88

1418.30

2007

66.18

27.73

1468.36

2008

14.88

28.39

903.25

2009

50.97

22.41

1115.10

2010

77.35

22.73

1257.64

2011

86.95

26.43

1257.60

2012

86.51

31.25

1426.19

2013

100.20

34.99

1848.36

2014

102.40

39.44

2058.90

2015

86.53

43.39

2043.94

2016

94.55

45.70

2238.83

2017

109.88

48.93

2673.61

2018

132.39

53.75

2506.85

2019

139.47

58.24

3230.78

2020

94.13

58.28

3756.07

Dividends did a pretty decent job in providing a good inflation hedge. 

The S&P 500 paid $14.90 in dividends in 1996 and $15.49 in 1997. The annual dividends kept growing to $48.93 in 2017, for an over 228% increase. 

The index earned $38.73 in 1996 and $39.72 in 1997. S&P 500 grew earnings to $109.88 in 2017 for a 183% increase. 

The S&P 500 index closed at 740.74 at the very end of 1996, and went all the way up to 2673 by the end of 2017, for a 260% increase.

I could have used a combination from any of the large cap dividend growth stocks like PepsiCo, Johnson & Johnson, Procter & Gamble etc, and reached similar conclusions that dividends generated from diversified portfolios tend to grow above the rate of inflation over time.

It also looks like dividends have managed to exceed inflation in each decade since 1960. The exception is in the 1970s, when dividends trailed slightly behind inflation. However, stock prices lost a lot more ground to inflation.

Period

S&P 500 Price Growth

Earnings Growth

Dividend Growth

CPI Growth

1960s

58.58%

77.74%

61.11%

31.08%

1970s

47.33%

172.05%

101.88%

112.37%

1980s

143.24%

51.10%

87.73%

58.62%

1990s

299.82%

147.81%

32.92%

31.75%

2000s

-4.74%

49.24%

40.95%

26.66%

2010s

198.66%

64.88%

150.33%

18.66%

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Sunday, May 9, 2021

Eleven Dividend Growth Stocks Rewarding Shareholders With A Raise

I review the list of dividend increases as part of my monitoring process. This is helpful in evaluating how my investments are doing. I review the dividend increase announcements, along with their corresponding press releases. The list of dividend increases is also helpful in identifying quality companies for further research. It is also helpful in observing companies act during a crisis. The companies with robust business models are able to weather the crisis relatively well, and are able to maintain and even increase dividends

There were several companies that bucked the trend of dividend cuts, and actually raised dividends to shareholders. Just as usual, I focus my review only on those companies that raised dividends last week, which also have at least a ten-year history of annual dividend increases.

FactSet Research Systems Inc. (FDS) provides integrated financial information and analytical applications to the investment and corporate communities in the Americas, EMEA, and the Asia Pacific.

The company raised its quarterly dividend by 6.50% to 82 cents/share. This increase marks the twenty-second consecutive year the Company has increased dividends, demonstrating its ongoing commitment to bring value to shareholders. During the past decade, the company has managed to increase dividends at an annualized rate of 13%.

The company is expected to earn $11.15/share in 2021.

The stock is selling for 30.24 times forward earnings and yields 0.97%.

Leggett & Platt Incorporated (LEG) designs, manufactures, and markets engineered components and products worldwide.

The company raised its quarterly dividend by 5% to 42 cents/share. This marked the 50th consecutive annual dividend increase for this newly minted dividend king. During the past decade, the company has managed to increase dividends at an annualized rate of 4.30%.

"We are also very pleased to be increasing our dividend for the 50th consecutive year, honoring our ongoing commitment to return value to our shareholders. As a result of this commitment over many decades, next year we will become a member of a select group of companies referred to as Dividend Kings.

The company is expected to earn $2.72/share in 2021.

The stock is selling for 21.13 forward earnings and yields 2.92%.

MSA Safety Incorporated (MSA) develops, manufactures, and supplies safety products that protect people and facility infrastructures in the oil, gas, petrochemical, fire service, construction, industrial manufacturing applications, utilities, military, and mining industries in North America, Latin America, and internationally.

The company raised its quarterly dividend by 2.30% to 44 cents/share. MSA is a newly minted dividend king which has increased its dividend annually for more than 50 consecutive years.  During the past decade, the company has managed to increase dividends at an annualized rate of 5.60%.  

The company is expected to earn $4.69/share in 2021.

The stock is selling for 35.26 times forward earnings and yields 1.06%.

Pool Corporation (POOL) distributes swimming pool supplies, equipment, and related leisure products in the United States and internationally. 

The company raised its quarterly dividend by 37.90% to 80 cents/share. This was the eleventh year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 16%.

The company is expected to earn $12.36/share in 2021.

The stock is selling for 35.91 times forward earnings and yields 0.72%.

UGI Corporation (UGI) distributes, stores, transports, and markets energy products and related services in the United States and internationally.

The company raised its quarterly dividend by 4.50% to 34.50 cents/share.

This was the 34th Consecutive Year of Annual Dividend Increases for this dividend champion. During the past decade, the company has managed to increase dividends at an annualized rate of 8.10%.

The company is expected to earn $2.98/share.

The stock sells for 15.33 times forward earnings and yields 3.02%.

Algonquin Power & Utilities Corp. (AQN) owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in Canada, the United States, Chile, and Bermuda.

The company raised its quarterly dividend by 10% to 17.06 cents/share. This marked the 13th year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 11.80%.

The stock sells for 11.60 times earnings and yields 4.29%.

RLI Corp. (RLI) is an insurance holding company, underwrites property and casualty insurance in the United States and internationally.

RLI raised its quarterly dividend by 4.20% to 25 cents/share. RLI is a dividend champion which has increased dividends in each of the last 46 years. Over the past decade, the company has managed to grow dividends at an annualized rate of 5.20%.

The stock sells for 37.26 times forward earnings and yields 0.88%.

ManpowerGroup Inc. (MAN) provides workforce solutions and services in the Americas, Southern Europe, Northern Europe, and the Asia Pacific Middle East region.

Manpower raised its semi-annual dividend by 7.70% to $1.26/share. This was the eleventh year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 11.80%.

The company is expected to earn $6.20/share in 2021. 

The stock sells for 19.80 times forward earnings and yields 2.05%.


Expeditors International of Washington, Inc. (EXPD) provides logistics services in the Americas, North Asia, South Asia, Europe, the Middle East, Africa, and India.

The company raised its semi-annual dividend by 11.50% to 58 cents/share. This was the 27th year of annual dividend increases for this dividend aristocrat. Over the past decade, the company has managed to grow dividends at an annualized rate of 10%.

The stock sells for 19.99 times forward earnings and yields 0.98%.

Cardinal Health, Inc. (CAH) operates as an integrated healthcare services and products company in the United States and internationally.

Cardinal Health raised its quarterly dividends by 1% to 49.08 cents/share. This was the 25th year of consecutive annual dividend increases for this dividend aristocrat. While it has a ten year annualized dividend growth rate of 10.10%, the dividend growth has slowed down in recent years to about 1%/year.

The company is expected to earn $5.99/share in 2021.

The stock is selling for 9.70 times forward earnings and yields 3.38%.

Microchip Technology Incorporated (MCHP) develops, manufactures, and sells semiconductor products for various embedded control applications in the Americas, Europe, and Asia.

Microchip Technology raised its quarterly dividend by 5.90% to 41.30 cents/share. This is the 21st consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has only increase dividends at an annualized rate of 0.70%.

The company is expected to earn $7.85/share in 2021.

The stock sells for 19.09 times forward earnings and yields 1.10%.

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