Health Savings Account (HSA) for Dividend Investors

A Health Savings Account is a tax-advantaged medical account which is available to individuals in the US who have enrolled into a high-deductible health plan (HDHP). For 2023, individuals cannot contribute more than $3,850/year, while families cannot put more than $7,750. There is a catch-up contribution of $1,000 for those 55 or older. Individuals who are enrolled in Medicare are not eligible to open an HSA. 

I first signed up for a Health Savings Account (HSA) with my employer almost a decade ago. I signed up for the HSA mainly as another way to defer money for future investment. As most of you know, I am already maxing out other tax-deferred accounts in an effort to cut one of my largest expenses.

Benefits

An HSA offers a triple tax advantage in most states. The contributions are before tax, which means that the account holder does not pay Federal, State and FICA taxes. If you were in the 24% marginal tax bracket, had a 5% state income tax rate, and you didn’t pay 7.65% for FICA, you will end up saving 36.65% merely by contributing to an HSA account. On $3,850, this comes out to $1,411.02 in tax savings right off the bat. The money can be used for qualified medical expenses at any age, without having to pay any taxes on such withdrawals. However, support documentation should be retained in case of an audit. Withdrawals not for qualified medical expenses are subject to a 20% penalty and income tax. After age of 65, withdrawals are not subject to a 20% penalty. While they continue to be tax-free for medical expenses, they are taxed at your ordinary income rate for any other type of distribution from the account.

I was attracted to HSA’s because of the large up-front tax deduction. When I contribute money to a tax-deferred vehicle, I have more money under my control, since I reduce the largest expense in my household budget ( taxes). I have done a similar thing by maxing out 401 (k) and Sep IRA contributions since early 2013. 

I was also attracted by the fact that money put in an HSA account compounds tax-free. In addition, unlike a Flexible Spending Account (FSA), the money does not have to be used by a certain date. Hence with an HSA the money carries over from one year to the next, and thus stays in the account and could potentially compound over time.

The other nice thing about HSA accounts is that they are portable. I can move balances to another plan, even if I am still employed and using my employer's HSA plan. In other words, I am not stuck with an HSA plan that may have high fees. I can either do an HSA Transfer or an HSA Rollover. 

An HSA Transfer involves filling up a form, and having the current HSA Custodian send the money to another HSA Custodian. Usually there is a small fee involved.

An HSA Rollover involves filling up a form, obtaining a check from the current Custodian and then depositing the money into the new HSA Account. While this avoids fees, you have to be careful to rollover the money within 60 days, or else face penalties and fees by the IRS. You can only do one HSA rollover within a 12 month period.

Drawbacks

One of the major drawbacks to HSA accounts is the large monthly fees with many providers. When I reviewed different providers in 2014 - 2015, it looked like a minimum account balance that is anywhere between $3,000 - $5,000 has to be maintained in cash, in order to avoid a monthly charge in the range of $2 - $5/month. 

Many employers tend to cover this amount for their employees, so this is a benefit. However, there are additional fees on each withdrawal, ordering checks to pay for items, opening fees, account closing fees etc. Plus, there are monthly fees if you plan to invest that HSA money into something. This is in addition to the fees for failing to maintain a minimum balance in the account. In addition, most of the investment options are limited to mutual funds, some of which have really high expense ratios that come close to 1%/year.

The one positive thing however is that a person is not stuck with an HSA provider, if their employer offers a high-fee HSA provider. One can simply rollover the funds from their original HSA administrator, to the HSA administrator of their choice. This is one thing I did a few years ago. I moved my HSA money to LivelyMe, which is a no-cost HSA alternative. 

The other drawback is the low limits on how much one can potentially defer. If limits for individuals are increased to at least match those on IRA or Roth IRA accounts, this would be a good start.

Best Providers

I looked at different providers, and looked at their costs to have an account, and availability of investment options. In my research, I give extra points for companies that are not going to charge me $4- $5/month on a $3,000 - $6,000 balance that takes 1 – 2 years to build up, or at least will not charge me monthly fees after my total balances exceed a reasonable amount of dollars. I am talking about eliminating as much in monthly or annual fees are possible, since some administrators tend to charge you an HSA Bank fee if you have less than $3,000 - $5,000 in a bank, in addition to charging you a monthly brokerage fee. I also wanted to find the broker that would allow me as much flexibility as possible in choosing investments that do not cost me a lot. 

When I originally wrote this article in 2015, there were not a lot of good options out there. At the end of 2021 however, there are two great options.

The first one is with Fidelity. Up until a few years ago, it was impossible to open an account with Fidelity. But now, it is relatively easy and anyone can open one to move money to a Fidelity HSA.

It offers No-Fee-HSA's, which means that you have a maximum amount of money working for you. There are no account service charges, minimum fees, or fees to invest your money. You can pretty much invest the money in anything you want from individual stocks, to ETFs or mutual funds. Plus, this is with Fidelity, which is an investing brokerage powerhouse.

The second one was with Lively up to 2023. It had no fees for HSA accounts, and also offered free investing options. There were no hidden charges. You could invest the money through TD Ameritrade. My only downside for Lively was that it is a relatively new player, so it may not be around for a long time if it gets acquired or goes out of business. 

One recent change with Lively is that their investment option is moving from TD Ameritrade to Charles Schwab. That's because Schwab has acquired TD Ameritrade. Unfortunately, that means there will be an annual fee of $24, unless the account holder holds $3,000 in cash in their Lively Account. At a 4% interest rate, that's an opportunity cost of $120/year to save on $24 in fees.

I have used both Fidelity and Lively, and really like the ease of opening and funding accounts. You can do pretty much everything electronically. You do need to fax information if moving assets, but that is similar to moving assets from one broker to the next. 

The thing to consider of course is that fees can change if minimum balances are changed as well. Plus, there might be fees assessed if you transfer money from one custodian to the next.

I have contributed to a Health Savings Account since 2015, and have enjoyed the process of accumulating funds there and investing them. One thing to note is that all of my employers that have offered an HSA have also matched a certain portion of contributions. This is similar to a 401 (k) match, but only for HSA's. In a way, it is another account to use to accumulate a nest egg in a tax efficient way.

Health Savings Accounts make perfect sense for those like me who are looking for another vehicle where they get a tax deduction upfront today, and receiving a tax-advantaged growth of their investments. The real nice part is that after age of 65 I can withdraw the money for whatever reasons I desire, and will not have to pay any penalties (if the money is spent on non-medical expenses, it is taxed at ordinary income tax rates). I have decided that even if I have to end up with an index fund in that Health Savings Account, I would be better off than picking individual dividend stocks in a taxable account. Let me walk you through a hypothetical (made-up) calculation.

I calculated that if I choose to invest $1,000 in an HSA that generates a net annual total return of 7%/year, I would end up with $5,807 in 26 years. This return assumes that no taxes are taken and also assumes fees paid are subtracted from returns ( meaning the gross return is slightly higher). However, if I were to earn those $1,000 from my day job but decided not to put them in an HSA, I would be left with $623.50. This is because I would be paying 24% Federal Tax, 5% State Tax, 1% City Tax and 7.65% FICA. If I managed to earn an after-tax annual total return of 9%/year for 26 years in a row, my account balance will be $5860. The break-even point will be 26 years. Of course I am not comparing apples to apples here, because an after-tax return of 9% in a taxable account usually requires a return above 10% even at today’s low rates on dividends and capital gains.

Conclusion

To summarize, I believe that HSA accounts provide several benefits to investors who want to build retirement savings, and have exhausted common vehicles such as 401 (k) or IRA's. 

The first advantage of HSA's is triple tax advantage, because of the deduction for Federal, State and FICA taxes. This leaves more money working for the investor. 

The second advantage is tax-deferred growth of that capital for decades. 

The third advantage is that this money can be withdrawn at any time, penalty free if it is for qualified medical expenses. It can also be withdrawn penalty free after the age of 65.  

The money is taxed after the age of 65 if used for non-medical purposes at the ordinary income tax rates. 

The drawbacks behind HSA's include fees, low variety of investment options and the fact that annual contribution limits are low. Of course, for those of us who understand the power of compounding, we know that even a small contribution of $3,000/year over a period of a couple decades could turn into a few nice supplement to the retirement nest egg.

Relevant Articles:

- Why I Considered Tax-Advantaged Accounts for My Dividend Investments
- Roth IRA’s for Dividend Investors
- Six Dividend Paying Stocks I Purchased for my IRA
- Twenty Dividend Stocks I Recently Purchased for my 401 (k) Rollover
- Nine Quality Dividend Stocks Purchased for the Roth IRA

Carlisle Companies (CSL) Dividend Stock Analysis

Carlisle Companies Incorporated (CSL) operates as a diversified manufacturer of engineered products in the United States, Europe, Asia, Canada, Mexico, the Middle East, Africa, and internationally.

The company is a dividend champion, which has increased dividends to shareholders for 46 years in a row.  Over the past decade the company has managed to grow dividends at an annualized rate of 13%/year.

 

The last dividend increase was in August 2022, when the Board of Directors approved a 38.90% hike in the quarterly distributions to 75 cents/share.

Chris Koch, Chair, President and Chief Executive Officer, said “As part of our legacy of being superior capital allocators, we are very pleased to announce a dividend increase for the 46th consecutive year. This 39% increase is our largest in the past 25 years, and reflects our strong, sustainable financial position, and confidence in continued growth of Carlisle’s earnings power. Our commitment to returning capital to shareholders is made possible by the support of Carlisle’s dedicated employees, who embrace our culture of continuous improvement and maintain a steadfast commitment to creating value for all stakeholders.”

The company has managed to boost earnings from $3.57/share in 2012 to $17.58/share in 2022. The company is expected to earn $18.05/share in 2023. We have to take forward guidance with a grain of salt, given the state of affairs in the world economy today.

 

Their Vision 2025 strategy is an interesting program. In Vision 2025, the company targets doubling annual revenues to $8 billion, expanding operating margins to 20%, and generating 15% ROIC. This would be achieved through 5% organic growth, and reducing costs by 1% - 2% of sales, by using efficiencies. The company is also working to make acquisitions and review existing divisions for further optimization. Carlisle expected to invest in M&A through 2025. The company is working to develop its employees as well, and spend money on capital expenditures, share buybacks and dividends to reward long-term shareholders.  Carlisle Companies is trying to reach $15/share by 2025. They expect revenues of 8 billion by 2025.

I like these slides on the Vision 2025 strategy:

https://s22.q4cdn.com/386734942/files/doc_presentations/2020/Vision-2025-CSL-Investor-Presentation_Updated-Feb7.pdf

Also check out the Vision 2025 Website

The company operates in these major segments: 

Construction materials accounted for 80% of 2021 revenues. Manufactures EPDM, TPO, and PVC roofing systems, as well as energy-efficient rigid foam insulations panels, spray polyurethane foam, and metal roofing products. Key end markets served include US and EU Non-residential and Building Envelope.

The risk factor is that a slowdown in construction amidst rising interest rates could slow down growth, leading to a decrease in profits. The impact of a slowing construction may not be seen for a few quarters to an year.

Interconnect Technologies accounted for 14% of revenues. Designs and manufactures high-performance wire, cable, connectors, contacts, and cable assemblies for transfer of power and data. Key markets served include Commercial Aerospace, Medical Technologies and General Industrial.

Fluid Technologies accounted 5% of revenues. Manufactures industrial finishing equipment for spraying, pumping, mixing, and curing of protective coatings for industrial applications. Key markets served include Transportation, General Industrial and Automotive.

The company has been active on the share repurchase front over the past 7 years. Prior to that, shares increased, due to acquisitions.

 

The company’s dividend is well covered from earnings. It has managed a conservative payout ratio that has largely remained below 30%.

 

Right now, the company looks fairly priced at 12 times forward earnings and yields 1.40%. 

Eight Companies Rewarding Shareholders With a Raise

I review the list of dividend increases every week, as part of my monitoring process. This process helps me identify companies for further research. It's also one of the steps that helps me monitor existing investments.

Dividends offer a strong signaling value. An increased dividend reflects the board's confidence in the company's ability to generate strong earnings and cash flow. It reinforces a company's commitment to a sound capital allocation strategy centered on delivering shareholder value. Increasing the dividend is also indicative of consistent performance and the board's confidence in a company's long-term strategy and growth trajectory..

Over the past week, there were 21 companies that announced dividend increases. Eight of these companies had managed to increase dividends annually for at least ten years in a row. The companies include:

This of course is just a list of dividend increases from the past week, not a recommendation.

When I review companies, I look at ten year trends in:

1) Earnings per share

2) Dividend payout ratio

3) Dividends per share

4) Valuation

Since I have some experience evaluating dividend companies, I also modify my criteria based on the environment we are in and the availability of quality companies. If I see a company with a strong business model and certain characteristics that I like, I may require a dividend streak that is lower than a decade. I have also found success in looking beyond screening criteria by purchasing stocks a little above the borders contained in a screen.

It is important to be flexible, without being too lenient.

You may like this analysis of Lowe's (LOW) as an example of how I review companies.

Relevant Articles:

- 16 Companies Rewarding Shareholders With a Raise Last Week

- Seventeen Dividend Growth Stocks Raising Dividends Last Week

- Thirteen Dividend Growth Stocks Rewarding Shareholders With a Raise

- Four Notable Dividend Increases From Last Week

Atmos Energy (ATO) Dividend Stock Analysis

Atmos Energy Corporation (ATO) engages in the regulated natural gas distribution, and pipeline and storage businesses in the United States. It operates in two segments, Distribution, and Pipeline and Storage.

The company is a dividend aristocrat with a 39-year track record of annual dividend increases. The last dividend increase occurred in November 2022, when Atmos raised its quarterly dividend by 8.80% to 74 cents/share.   

During the past decade, Atmos has managed to grow dividends to shareholders at an annualized rate of 7.20%. The five-year annualized dividend growth is at 8.70%.

At the same time, the company has managed to boost earnings from $2.37/share in 2012 to $5.61/share in 2022. Atmos Energy is expected to earn $6.03/share in 2023 and $6.42/share in 2024.

Growth will be generated through continued capital investment in the business. The company believes that most of that capex would be immediately accretive within half a year or so. Most of the capex is on increased safety and reliability.

The company’s earnings are generated through regulated gas distribution and natural gas transmission and storage.

Growth in rates over time should compensate for investments. The risk is that states may not be as accommodative to utilities. This risk is somewhat mitigated by the fact that Atmos operates in several states in the US – Texas, Louisiana, Colorado/Kansas, Mississippi, Kentucky.

The company obtains capital by selling shares, in order to fund its growth Capex initiatives. As a result, the number of shares outstanding increased from 91 million in 2012 to 138 million in 2022.

 

The dividend payout ratio has decreased from 58% in 2012 to 48% in 2022. The lower dividend payout ratio can result in a dividend growth that is higher than earnings growth over the next decade.

I believe that the stock is fairly valued today at 19.30 times forward earnings. The yield is low for a utility at 2.55%, but the dividend payout ratio is lower too.

 Relevant Articles:

- Nine Companies Rewarding Shareholders With Raises

- 26 Dividend Champions for Further Research

- 24 Dividend Aristocrats For The Next 24 Years

- Dividend Aristocrats List for 2023

 

How I Would Invest A Lump Sum Today

One of the most common questions I receive relates about the idea of how to invest a lump-sum amount. I believe that the answer is not a one sized fit all approach. I also believe that the answer for the same person may vary from time to time.

In general, there are pros and cons to each approach. If you look at the historical data, it makes sense to invest money as soon as possible. The stock market usually goes up most of the time, and when you invest, you get to enjoy receiving dividends and the opportunity for capital gains. Of course, this approach assumes that past performance is an indication of future results – this is the warning below each investment that is discussed. The future cannot be forecasted, so in theory, any historical data is not going to be a bulletproof way for future riches. 

Either way, the lump sum investing approach also uses the common-sense theory that since no one can predict the future, it makes sense to invest right away. If you do not invest right away, then you are engaging in timing the market.  

To put more support behind lump-sum investing, if you have the money to buy 100 shares of Johnson & Johnson today, you get to enjoy the right to $404 in future annual dividends from the start. That’s much better than waiting in cash, and earning a lower level of interest income. (taxed at worse rates as well).

The longer you sit in cash, putting off investing in a stock, the more future dividend income you are missing out on. So perhaps, as long as the valuation is not ridiculous, it may make sense to invest as soon as one has the cash. That assumes that this investor will continue buying even during the next bear market or two, and even after securities fall by 20% - 50% or more. It assumes that the investor will not sell in panic, merely because the stock price is lower.

If you are more risk averse, it may make sense to wait before you invest. Some readers spread the money over a certain period of time. They do so in order to avoid the risk of putting everything at the highest point, only to see a 40% - 50% loss, dividend cuts etc. I believe that if that approach works for the risk tolerance of these investors, it is preferable to them trying to wait for a bear market for several years, while they are waiting in cash for a crash. At least with the dollar cost averaging approach, they have a plan in action to conquer their fears. An imperfect plan you can stick to is much better than not having a plan in place. The downside to that plan however is that you may be missing out on dividend income, and the potential for future appreciations, because you are sitting in cash for a decent chunk of time. To put it in other words, if you plan to own 100 shares of Johnson & Johnson that pay $4.04 in dividends, and have the money to do it, you miss out on $404 in annual dividends by sitting in cash. 

Both of those examples are looking at money that is earmarked for long-term investment. If you need money within the next 1 – 3 years for a major expense such as a down payment on a house, a health issue, a car or college, it makes sense to keep the money in cash/fixed income.  If you have a large credit card debt, you are better off paying it off in full, before starting to invest in equities.  

Depending on your risk tolerance, it may make sense to de-risk by paying off your mortgage. The downside of course is that you may miss out on future dividends and appreciation by doing so – just ask anyone who paid off their mortgage between 2010 and 2014. The upside is that you will get a totally different perspective for someone who paid off their mortgage in 1999 - 2000, and missed out on the bear market from 2000 - 2003.

I have thought a lot about the topic, and my opinion has shifted over the years. I went from being risk-averse to slightly less so. But If get a large enough lump-sum amount, I would most likely invest it right away.  If I were a reader of my newsletter, I would likely put the money in an equally weighted portfolio of all companies in the portfolio. I would of course keep costs to the bone, and invest preferably in a tax-advantaged account. Either way, I would continue investing in the companies I identify every month afterwards. The weights may be different, if we for example put $50,000 in the 50 or so companies in the portfolio today, and then put $1,000/month in ten companies for several months. Over the course of the next 5 – 10 years however, things will work themselves out of this initial lopsided situation.

While some companies appear to have stopped growing dividends, others seem to have reduced the rate of dividend growth, while a third group may appear overvalued, I believe that after a long period of time, (e.g. ten years), the investor may be better off investing right away and holding, than sitting in cash waiting for the right pitch. This opinion may have been influenced by the relentless rise of equity prices over the past decade however too. My earlier experiences in 2007 – 2009 showed me that it pays to wait before you invest, despite the data showing me that under most scenarios it has historically paid to invest right away. The issue of course has always been that past performance is not an indication for future results. The other issue is that your personal situation may vary from the averages due to skill or luck. Speaking of personal experiences being different than averages, at the beginning of the decade, I had a colleague who went into a surgery that supposedly had a 98% success rate. Unfortunately, he turned out to be of the unlucky 2% and perishing at the tender age of 27. He was one day older than me. Fate can be a tricky thing.

Alternatively, one could also put the money on an equally weighted scale in the 30 members of the Dow Jones Industrials Average or Dividend Aristocrats or Dividend Champions if they had a lump sum.

If I invest right away, I get to enjoy dividends right away. If share prices decline after my investment, I will just use the dividend cash to acquire more shares that pay more dividends. I have come to believe that timing the markets is a fruitless endeavor. Certain decisions such as waiting to invest are a way of market timing. I invest my money regularly whenever I have cash to invest, so I do not see a reason not to do that with lump sum amounts too. 

Thank you for reading!

Relevant Articles:

- Should I buy dividend stocks now, or accumulate cash waiting for lower prices?

- Dividend Investors: Stay The Course

- How to invest a lump sum

- Dollar Cost Averaging Versus Lump Sum Investing

The first $100,000 is the hardest

Charlie Munger is Warren Buffett’s business partner at Berkshire Hathaway. He is a successful lawyer, and investor, who was instrumental in helping Warren expand his investing horizon. Charlie is credited with encouraging Buffett to invest in high quality businesses, which compound over time. Before that, Buffett spent most his attention to statistically cheap stocks.

Charlie Munger is not studied as well as Warren Buffett, which is a shame. It’s a shame because Charlie Munger has shared a lot of insightful lessons on investing, human nature and human biases, which could help many aspiring investors.

There are two good books I have read about Charlie Munger. The first one is “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger”, and the second is “Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition”.

There is a passage from “Damn Right”, which really resonates with me:

Charlie Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth.

Making the first million was the next big hurdle. To do that a person must consistently underspend his income

Getting wealthy, he explains, is like rolling a snowball.

It helps to start on top of a long hill—start early and try to roll that snowball for a very long time.

It helps to live a long life.

There is another quote from him from a shareholder meeting, saying that

“The first $100,000 is a bitch, but you gotta do it.

I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.

After that, you can ease off the gas a little bit.”

Just for reference, $100,000 in 1960 has the same purchasing power as $1,026,653 today. Perhaps the modern version of this story is that the first million is the hardest.

In another reference, $100,000 invested in 1960 in the S&P 500 would be worth over $40 million today. This investment would be generating over $640,000 in annual dividend income.

These are some simple, but powerful lessons in these quotes.

The first lesson is that you need to spend less than what you earn, in order to be able to find the savings to make any successful investments. It makes sense that if you live paycheck to paycheck, you will never be able to accumulate any savings to invest for your long-term future.

The second lesson is that once you have savings, you need to invest them intelligently. Once you have a process in place, you stick to it, and keep adding money to your portfolio. You start small, and the efforts from the first few years are not very visible. After saving and investing for 5 – 10 years however, the power of compounding starts showing its true force. Once you accumulate a decent sized nest egg, it will grow net worth and investment income over time, without needing any additional capital from you. At this point, investment income will likely exceed your investment contributions.

I would personally keep adding, for as long as I can, because I enjoy the process of investing for the future. But it is nice to know that once you reach a certain amount of net worth, that is invested intelligently, you know that no matter how hard you mess up in life, you have a third worker quietly working for you, compounding your capital, income and sharing the fruits of its labor with you by working 24/7.

The third lesson is about the power of compounding. It is a small trickle at the beginning. Once you invest for a while, the power of compounding becomes a wonderful force, which keeps accelerating net worth and investment income. You investment capital snowballs into enormous amounts the longer you keep it invested, and do not interrupt the compounding process.

The largest effect of compounding is observed at the end of the financial independence journey. For example, if you invest $1 at 10%/year, you will have $2 in roughly 7 years. However, if you keep that dollar invested at 10%/year for 50 years, you end up with over $117.

For example, Warren Buffett became a billionaire in 1986. He is now worth over $112 billion. More than 99% of his net worth was generated in the past 35 years, long after he turned 56. That's also despite the fact that he has donated almost half of his Berkshire Hathaway shares that he owned in 2006.

If you manage to compound money at a high rate, and do it for a long period of time, you would end up with a very high amount.

Relevant Articles:

- How Warren Buffett built his fortune
- Charles Munger: A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
- Simple Investing Principles to Follow

Seventeen Dividend Growth Stocks Raising Dividends Last Week

I review the list of dividend increases every week, as part of my monitoring process. I usually focus my attention on the companies with a ten year streak of annual dividend increases, and then review each company using my criteria. I am always on the lookout for new ideas, and to determine if my existing holdings are working. I also want to be ready to act quickly, when the right time arrives.

This exercise helps me to evaluate companies I already own, and see how they are doing. This is a helpful piece of the puzzle, that would be helpful when/if I decide to add to these companies at the right price.

This exercise also helps me identify companies for further research. A large part of the time is spent reviewing companies, screening for companies, and trying to learn more about companies, their business, etc. 

It is not glamorous at all, but dull and boring. 

But it does pay dividends.

There were 48 companies that announced a dividend increase over the past week. Only 17 of these companies have also managed to increase dividends for at least ten years in a row. The companies include:

This of course is just a list, not a recommendation.

When I review companies, I look at ten year trends in:

1) Earnings per share

2) Dividend payout ratio

3) Dividends per share

4) Valuation

Since I have some experience evaluating dividend companies, I also modify my criteria based on the environment we are in and the availability of quality companies. If I see a company with a strong business model and certain characteristics that I like, I may require a dividend streak that is lower than a decade. I have also found success in looking beyond screening criteria by purchasing stocks a little above the borders contained in a screen.

It is important to be flexible, without being too lenient.

You may like this analysis of PepsiCo (PEP) as an example of how I review companies.

Relevant Articles:

- Dividend Aristocrats List for 2023

- Dividend Kings for 2023

- My Favorite New Investing Resource

- 26 Dividend Champions for Further Research

Companies included in this article: AAPL, ABR, CCOI, CPK, EXPD, FDS, FR,GFF, LEG, MAN, MCHP, MSA, PEP, POL, RLI, UGI, WTS,

Paychex (PAYX) Dividend Stock Analysis

Paychex, Inc. (PAYX) provides payroll, human resource (HR), retirement, and insurance services for small to medium-sized businesses in the United States and Germany. The company is a dividend challenger, which has rewarded shareholders with an annual dividend raise since 2010. Paychex was a dividend achiever until 2009, when it stopped raising dividends during the Global Financial Crisis. 

Back in April 2023 the company announced that its board of directors approved 13% increase in the company’s regular quarterly dividend, to 89 cents per share. This was the 13th consecutive annual dividend increase for Paychex.

“Our board’s decision to again increase the quarterly dividend demonstrates our strong financial position and confidence in our ability to continue to return value to our shareholders, while also investing for growth in the business today and in the future,” said Paychex President and CEO, John Gibson.

Over the past decade, Paychex has managed to boost its dividends at an annual rate of 8.90%/year. The company has picked up the pace of dividend growth to 9.60% during the past five years.

The company has managed to grow earnings per share at an annual rate of 9.70%/year. The consensus for 2023 and 2024 earnings per share for Paychex is $4.27 and $4.58. In comparison, Paychex earned $3.84/share in 2022.

Paychex has a three-legged footprint for its cash deployment. Paychex allocates cash to strategic growth initiatives, makes strategic acquisitions and distributes the rest out to shareholders in the form of dividends and some share buybacks.

The company serves the business needs of over 600,000 small to mid-sized clients in the US. The majority of these clients have less than 100 employees. The number of businesses is cyclical, as it rises and falls with the expansion or contraction of the economy. Low unemployment rates and high labor participation rates are good for payroll processors like Paychex. Bankruptcies and mergers typically reduce the number of customers. New business formations help companies like Paychex. Establishing and maintaining solid long-term relationships with the clients is important for business process outsourcing companies like Paychex.

Paychex offers HR, employee benefits, payroll processing, tax returns filling and submission, as well as accounting records to small and mid sized companies that have less than 100 employees. The company has a solid competitive advantage due to scale of operations and the fact that it targets a the small to mid-size employer niche. There are significant barriers to entry in terms of the need for large fixed investments. It makes sense for those small businesses to use the expertise of someone like Paychex, rather than do it on their own. Once a client is signed up, they are unlikely to abandon their provider since most businesses try to avoid switching costs associated with that action.

Due to the high switching costs, the company is able to raise prices to its customers over time. In addition, it is able to further increase its competitive position by introducing and delivering new and additional services to its offering mix. This ensures stickiness in the relationships and helps in retention of customers. The company can offer additional services at a low marginal cost due to its sheer scale of operations.

Increasing reporting requirements for businesses is a long-term tailwind for companies lie Paychex. The introduction of the ACA has been beneficial for Paychex over the past five years, since employers tried to outsource a lot of Human Resource functions.

The combined interest on funds held for clients and corporate investment portfolios benefit from higher interest rates and slightly higher investment balances over time. Basically, Paychex generates money from client funds that are waiting to be distributed. If interest rates increase, Paychex will generate additional profits from this activity.

Additional profits can be generated through strategic acquisitions. 

Over the past decade, the dividend payout ratio decreased from 84% in 2012 to 72% in 2022. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The company rewards shareholders with dividends, rather than a mix of dividends and share buybacks. 

I actually like that arrangement, because Paychex shares have been richly valued for the better part of the past decade. Plus, I prefer when the policy to distribute excess earnings is more straightforward, and is not done as a way to game earnings per share growth through share buybacks.

Right now Paychex is selling at 25.25 times forward earnings and yields 2.93%. 

16 Companies Rewarding Shareholders With a Raise Last Week

I review the list of dividend increases each week, as part of my monitoring process. There were 39 companies that increased dividends over the past week.

I reviewed the list and included the companies that have both raised dividends last week and have managed to raise dividends for at least ten years in a row. There were 16 companies that fit this simple screen:

This list is not a recommendation to buy or sell stocks. It is simply a list of companies that raised dividends last week. The companies listed have managed to grow dividends for at least ten years in a row.

The next step in the process would be to review trends in earnings per share, in order to determine if the dividend growth is on strong ground. Rising earnings per share provide the fuel behind future dividend increases.

This should be followed by reviewing the trends in dividend payout ratios, in order to check the health of dividend payments. A rising payout ratio over time shows that future dividend growth may be in jeopardy. There is a natural limit to dividends increasing if earnings are stagnant or if dividends grow faster than earnings.

Obtaining an understanding behind the company’s business is helpful, in order to determine how defensible the dividend will be during the next recession. Certain companies are more immune to any downside, while others follow very closely the rise and fall in the economic cycle.

Of course, valuation is important, but it is more art than science. P/E ratios are not created equal. A stock with a P/E of 10 may turn out to be more expensive than a stock with a P/E of 30, if the latter is growing earnings and the former isn’t. Plus, the low P/E stock may be in a cyclical industry whose earnings will decline during the next recession, increasing the odds of a dividend cut. The high P/E company may be in an industry where earnings are somewhat recession resistant, which means that the likelihood of dividend cuts during the next recession is lower.

You can check out my analysis of Johnson & Johnson (JNJ) for more detail on how I review companies.

Relevant Articles:

- Thirteen Dividend Growth Stocks Rewarding Shareholders With a Raise

- Four Dividend Growth Stocks Delivering Dividend Raises to Shareholders

- Four Notable Dividend Increases From Last Week

- Three Dividend Growth Stocks Rewarding Shareholders With Raises

The building blocks of an investing process

The goal of this website is to inspire readers to identify their goals and objectives, and then create a process to achieve them. I shared this article with readers of my Dividend Growth Investor Newsletter a few months ago. 

This process should be able to address the following:

1. What is your investable universe

2. How to identify companies for further research

3. How to evaluate individual companies

4. When to buy them

5. How much to allocate/risk

6. How to monitor investments

7. When to sell

8. How to improve

I will discuss each point in a little bit more detail below (as it pertains to my situation0:

1. What is your investable universe

The investable universe is the total population of companies, that I would leverage to identify companies for further research. My investable universe is the list of companies that have managed to increase dividends for at least 5 years in a row. Most often however, I would start with companies growing dividends for at least 10 years. 

Some good lists include the Dividend Aristocrats and Dividend Champions, all of which look for companies that have increased dividends for at least 25 years in a row. The aristocrats looks for S&P 500 companies only however. Albeit, there are aristocrats lists covering the S&P Midcap sector, so those should be added too. 

A good list is the dividend achievers one, which includes the companies that have managed to raise dividends for at least a decade.

I love the Dividend Champions/Contenders/Challengers list, which is updated here.

2. How to identify companies for further research

The investable universe is about 800 companies in the US. That’s a pretty big number of companies. In general, the investor may want to familiarize themselves with as many of them as possible, one at a time. However, it is much easier to screen out companies, based on parameters set by the investor.

I tend to focus mostly on companies with 25 year track records, though I could occasionally go as low as 5 years, if I see some promising company. There is a trade-off between a short and a long track record of annualized dividend increases, mostly in terms of dividend growth but also how defensible that is. Companies with longer track records of annual dividend increases may turn out to be able to grow dividends for much longer than a company with a shorter track record. That’s because the shorter track records are generally untested, and there’s a high probability of them being cyclical. 

I narrow the list by using a screening criteria. In general I look for:

1) A track record of annual dividend increases

2) Dividend growth exceeding a certain percentage over the past decade

3) Earnings per share growth over the past decade

4) A dividend payout that is sustainable

5) A business I understand

6) Quality – Moat

7) Good valuation

My screening process is a collection of some objective criteria, as well as subjective criteria. Each investor is different, and each investor perceives information differently based on their experiences and knowledge. It’s important to stick to your circle of competence, while also trying to expand it over time however.

I have watchlists of companies I would love to buy at a certain valuation, and I also monitor companies for weekly dividend increases. I am exposed to ideas of other investors and general conditions with major US companies however, which may or may not impact my decision to look at a company.

3. How to evaluate individual companies

The list of about seven items above is a good way of what I look for, when evaluating individual companies. As you can see from my analyses below, I tend to focus on qualitative and quantitative factors.

I look at the latest dividend increase, in comparison with the last 5 and ten years. I like to look at trends in dividends per share to evaluate how things are going. Dividend policy tends to show me how management thinks about the business conditions in the near term, and longer term.

I also tend to review trends in earnings per share over the past decade. Rising earnings per share are the fuel behind future dividend increases and growth in intrinsic value. I like to see how earnings per share did over previous recessions, and I am always on the lookout for stagnating EPS growth. I’m also on the lookout for one-time items as well – I tend to try and normalize things.

The dividend payout ratio is helpful in Identifying whether dividends are safe. In general, I want to see this ratio stuck in a range. This means that growth in dividends per share closely resembles growth in earnings per share – this is especially true for mature companies. Some companies that just recently initiated dividends can afford to grow them faster than earnings, since they start it off a low base. However, once a natural payout ratio is achieved, earnings and dividends should grow at roughly a similar rate. I am on the lookout for dividends growing faster than earnings, because that may be a warning sign of bad things to happen.

I also focus on the absolute number of the dividend payout ratio. Anything below 60% seems sustainable in general. However, a company with a higher payout ratio requires closer monitoring. If it consistently manages to grow dividends and maintain a high payout ratio, that is a plus. However, there is always a higher risk with higher payout ratios that the next recession would result in a lower earnings power, which could result in a dividend cut. This is where it is important to mention that the trend in payout ratio and the absolute value, should also be evaluated relative to earnings per share growth, stability of the business, defensibility and how cyclical it is.

I also like to evaluate companies qualitatively. This means understanding the business, how it can grow, and see how it survived over the past calamities it was exposed to. This is where having a moat or a strong competitive advantage can be helpful. That could mean being part of a duopoly/oligopoly, having an exclusive government license, some unique product/patent, a strong brand name, lowest cost producer, network effects go into effect. This could be a subjective part of the analysis.

4. A dividend payout that is sustainable

Analyzing companies is great. But even the best company in the world is not worth overpaying for. Knowing when to buy an investment is as important as buying the right investment in the first place.

I try to buy companies when I think they are attractively valued. In general, I look at the current P/E ratio, I look at defensibility/cyclicality of the earnings stream, and I look at historical growth and potential growth expectations. I also look at whether I own the company or not already.

If I see two companies with a P/E of 20, yield of 3% and dividend growth rate of 6%, I would prioritize the one that I do not already have a position in. 

I may prioritize a company with a P/E of 20, yield of 3% and growth of 6% over a company with P/E of 10, yield of 4% and growth of 7% if I thought that the latter is cyclical and the former is more defensive and less likely to suffer during a recession. A higher yielding stock is of no use if it cuts dividends during the next recession.

I tend to build positions slowly and over time. I do reserve the right to change my opinion on the stock, if it turns out I was wrong.  Quite often, slowing down in earnings growth and dividend growth may give me a pause.

I also want to have the best odds of building a decent position size. That’s mostly due to the limiting factor of when I have funds available to invest in the first place. I have a set amount to invest monthly, and do not have hundreds of thousands sitting in cash, waiting to be deployed. Hence, when I initiate a position in a security, I try to estimate the odds of being able to deploy money and build a position over time to at least a decent position size.

I also tend to prioritize companies that are rarely undervalued when building positions, over companies that are often attractively valued.

5.   How much to allocate/risk

Risk management is very important to me as an investor. It ensures I live for another day, and another dividend.

I do a lot of analysis on companies I buy, I look at a lot of different data points too. However, life is unpredictable. It’s important to understand and accept that, and have some humility. 

I try to limit risk through diversification. I tend to own a lot of companies from different industries, and even countries too. I also tend to build my positions slowly and over time. I tend to avoid overpaying for securities and I also tend to avoid adding to companies if the story changes ( dividend growth goes to zero for example or earnings start decreasing/flatlining).

I also tend to try and weight my positions as equally as possible. You may have noticed that I equally weighted the positions in my Roth IRA contributions in 2022 and 2023. That’s because I do not really know exactly which of the companies I own will be the best and the worst today. I believe they are all great, but I also know that the conditions over the next 30 years may result in changes, that could render many of my analyses obsolete. That’s ok. The goal is to minimize risk per individual position, and maximize potential for gain. As you know, if I put $1,000 in a stock, the most I will lose is the money I invested upfront, less any dividends received and reinvested elsewhere. However, my upside is unlimited, provided I do not sell early. This is why I rarely sell by the way, because the opportunity cost is usually too high, especially if we are talking about quality cash machines that are dividend growth stocks.

It gets trickier when I invest a set amount each month. However, it is still possible to decide on position limits. I typically try to avoid having more than 5% in a single security or having more than 5% of my dividend income coming from a single stock. I would simply stop adding to it if it got there, but I would not sell. In a portfolio where I plan to add $1,000/month for 15 years (180 months), I expect to put about $180,000. This means that if I end up with say 50 companies, I should plan to put about $3,600 per security. That would be my limit. I may go overboard however. But I should not have more than $9,000 put in a single security. This limit would also be going up over time, but won’t be at $9,000 until much later in the 15 year journey.

If we are talking about having a maximum of 100 companies, that translates into never putting up more than $2,000 in a single security over a period of 15 years. That’s a good risk management idea, which limits the amount I can lose per security to just $2,000. If I stop adding to a stock at $2,000 in cost, then I can also potentially focus on other lucrative opportunities. I also stop adding to a stock if the conditions worsen too, during the accumulation process. That also keeps amounts at risk per security in check. This is why I end up with a lot of small positions, because I take a lot of small risks. Sometimes things just don’t work out during the dating process. The flipside is that if I do not build a high enough position quickly, I may end up missing out on future opportunities. There is a trade-off in everything.

6. How to monitor investments

Monitoring investments can be done in a variety of ways. 

It could include checking out annual report, quarterly press releases, dividend announcements. The goal of course is to avoid being overwhelmed, while still knowing what’s going on.

In general, I try to take a look at existing companies once every 12 – 18 months. I invest in companies that are resilient and have been around for a long period of time. Nothing significant would happen every 3 months, though it is helpful to check once an year. This involves basically updating my analysis/review. 

I give first priority to the companies that seem attractively priced, because that analysis would be my support behind future additions to said investment. I then give priority in analysis updating to companies that do not seem attractively valued, but seem fundamentally sound and promising. For companies that do not seem attractively valued and fundamentally promising, I may skip doing the work. 

My monitoring process does involve looking at dividend increases. That’s because when I buy a quality company at an attractive valuation, I expect to hold on to it for years, and enjoy rising earnings and dividends. For as long as the dividend is not cut, I would hold on to that position. Once the dividend is cut however, that means that my original thesis was wrong. Hence, I sell.

The challenge with monitoring is that it could take a lot of time, but the added benefit may not be worthwhile. A lot of the companies I have bought seem to be the types that can potentially be tucked into a safety deposit box, and forgotten about. That’s my premise or belief at least. While things change, and some of the companies I own would disappoint dearly, chances are that there would be ones that do better than expected. The latter types would likely cover any losers out there, and hopefully propel that portfolio forward. At least that’s my belief/theory.

Hence, the danger of monitoring is that the investor may see one piece of what sounds like negative news to them, and they would sell a potentially promising company. And if the investor sells those promising companies too early, they would be missing out on that future potential that would cover the losers they would encounter in their investment lifetimes.

This is why I believe it’s best to limit amount at risk per company, so if it doesn’t work out, I know how much I would lose at most. That way the downside is limited. But by patiently holding on for as long as possible, I give companies maximum benefit of the doubt to hopefully realize their full unlimited potential.

7. When to sell

I sell very rarely. 

That’s because turnover is costly in terms of commissions, fees and taxes. In addition, turnover is costly in terms of opportunity cost. 

I sell basically after a dividend is cut. That’s because I invest in companies, expecting earnings and dividends to increase over time. I am willing to ride on this long term trend for years, if not decades. A dividend cut is an admission that my thesis is broken. So I sell, clear my head, and allocate proceeds elsewhere. If a company start raising dividends again, and meets my entry criteria, I would consider it though. 

I also sell after a company I hold is acquired. In general though, I rarely have a choice in these matters. I am not as excited when companies I own get acquired, because I always feel like I am being robbed of my future potential. After all, an acquirer is not likely to be buying another company for charity purposes – they probably see the potential like you and me. But they want to get all of it for themselves, and provide us with a pittance of a premium to last Fridays closing price. Sorry, I went on a tangent again.

I have often sold stock for other reasons too. They have been mistakes, but I would mention them, because you may have better luck than me.

Some folks sell after a valuation gets out of hand. Then they buy something else with the proceeds, which seems cheaper. This sounds like a logical approach to many. The pitfalls are that the company you thought was expensive was actually cheap in hindsight. For example, if that stock had a P/E of 30 and a yield of 1%, it looks expensive. But if growth was 15%/year, that stock could quadruple earnings and dividends in 1 decade. So in 10 years that stock could yield 4% on cost, and even if P/E declines to 20, the stock can deliver a 167% return. Of course, if I sell at a profit in a taxable account, I’d also pay taxes on those realized capital gains. Perhaps another reason why I prefer investing through retirement/tax deferred accounts first.

On the other hand, if I bought a stock with a P/E of 10, and a dividend yield of 3%, it may look like I got myself a bargain. However, if earnings and dividends growth turns out to be slower than expected, I may not get myself much of a bargain after all.

Of course, if you are able to spot undervalued gems frequently, it may make sense to sell the least promising companies with the most promising ones. However, those are hard to spot perfectly in advance. There may be steep opportunity costs in the process of replacing one company with another.

8. How to improve

This is the fun part of it all. After investing for a certain period of time, it makes sense to sit back, gather our notes, and see if there are any lessons to be learned. This may involved studying transaction history, studying past analyses/reviews, in order to identify any room for improvement and any lessons that can help with our investing process.

My mistakes made have included:

- Selling due to some “reason”

- Trying to justify a poor performance with verbiage and narratives

- Not using retirement accounts early enough

- Trying to “time” the markets

- Concentrating in “my best idea”

Improving also means observing how other investors operate, and trying to incorporate “best practices”, ideas etc. It’s easier said than done, and it may involve some trial and error.

Looking at strategies that are different than yours, and learning from people who share different opinions from you can be beneficial. I spent a decade looking at ticker tapes, reading books on different strategies before I decided on dividend growth investing. Buying companies with growing dividends is an idea taken from trend following and momentum. Buying and Holding diversified portfolios with low turnover is an idea taken from indexing. Buying companies at attractive valuations, while trying to avoid overpaying is an idea taken from value investing. My edge is in buying a diversified portfolio of quality dividend stocks at attractive valuations, and then holding on to them tightly for decades. In a world where everyone has a short attention span, and everyone is worried about losing a fraction of a penny to high frequency traders, it pays to invest for the long term. Trying to improve can pay off larger dividends and capital gains for you down the road.

Thirteen Dividend Growth Stocks Rewarding Shareholders With a Raise

As part of my monitoring process, I review the list of dividend increases. This process helps me review how the companies I own are doing. It also helps me identify companies for further research. I usually focus on the dividend increases for companies with a dividend streak longer than ten years in a row.

For this weekly review, I tend to focus my attention on companies with at least a ten year history of annual dividend increases, which also raised dividends last week. I provide a quick overview of each company that includes the amount of the most recent dividend increase, and compares it to its recent historical record. I also review the streak of annual dividend increases, and review earnings and valuation information.

There were several notable dividend increases over the past week:

This list is not a recommendation to buy or sell stocks. It is simply a list of companies that raised dividends last week. The companies listed have managed to grow dividends for at least ten years in a row.

The next step in the process would be to review trends in earnings per share, in order to determine if the dividend growth is on strong ground. Rising earnings per share provide the fuel behind future dividend increases.

This should be followed by reviewing the trends in dividend payout ratios, in order to check the health of dividend payments. A rising payout ratio over time shows that future dividend growth may be in jeopardy. There is a natural limit to dividends increasing if earnings are stagnant or if dividends grow faster than earnings.

Obtaining an understanding behind the company’s business is helpful, in order to determine how defensible the dividend will be during the next recession. Certain companies are more immune to any downside, while others follow very closely the rise and fall in the economic cycle.

Of course, valuation is important, but it is more art than science. P/E ratios are not created equal. A stock with a P/E of 10 may turn out to be more expensive than a stock with a P/E of 30, if the latter is growing earnings and the former isn’t. Plus, the low P/E stock may be in a cyclical industry whose earnings will decline during the next recession, increasing the odds of a dividend cut. The high P/E company may be in an industry where earnings are somewhat recession resistant, which means that the likelihood of dividend cuts during the next recession is lower.

You can check out my analysis of Johnson & Johnson (JNJ) for more detail on how I review companies.

Relevant Articles:

- Four Dividend Growth Stocks Delivering Dividend Raises to Shareholders

- Three Dividend Growth Stocks Rewarding Shareholders With Raises

- Four Notable Dividend Increases From Last Week

- Eight Companies Working Hard For Their Stockholders

Johnson & Johnson (JNJ) Dividend Stock Analysis 2023

 Johnson & Johnson (JNJ), together with its subsidiaries, is engaged in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics. This dividend king has paid dividends since 1944 and has managed to increase them for 61 years in a row. Dividend increases have been like clockwork every year for decades.

The company just raised dividends by 5.30% to $1.19/share. This is the 61st year of consecutive annual dividend increase for this dividend king.

Johnson & Johnson earned $3.86/share in 2012 and managed to grow earnings to $6.73/share in 2022. The company expected to earn $10.51/share in 2023.

Johnson & Johnson has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. This makes the company somewhat immune from economic cycles. Investors looking for a safe and dependable earnings can look no further than Johnson & Johnson. In addition, the company has strong competitive advantages due to its scale, leadership role in various diverse healthcare segments, breadth of product offerings in its global distribution channels, continued investment in R&D, high switching costs to users of its medical devices, as well as its stable financial position.

Future profits growth could come from new product offerings, which are the result of continued investment in research and development, and through strategic acquisitions.

Note that Johnson & Johnson announced a little over an year ago that it would likely be splitting into two companies - one focused on consumer products and the other on pharmaceuticals and medical technologies. It’s consumer health segment will be called Kenvue.

I am not sure how the dividend would be split yet. However, my guess would be that shareholders of legacy Johnson & Johnson would likely generate the same amount of total dividend income. It would just come from two companies, as opposed to one. I would give the spin-off some leniency in getting set-up. But if they do not pay a dividend within an year after the split, I may end up removing them from the portfolio.

Also note that Johnson & Johnson is involved in lawsuits related to its baby powder potentially causing cancer. The suits allege that this powder contains talc, which may have asbestos. These lawsuits could be costly in terms of damages to claimants, and loss of focus on management part. The company has tried to shield itself from those lawsuits by placing the affected subsidiaries in a separate company, and filing for chapter 11 for those subsidiaries only. This request has not been successful in shielding itself from this liability. This could potentially turn out to be very costly for JNJ. Or it could turn out to be a big nuisance, and the company could move on. 

Johnson & Johnson has managed to reduce number of shares outstanding over the past decade, which helped earnings per share growth. Between 2011 and 2013, the number of shares went from 2,775 million to 2,877 million and then declined to 2,664 million. The short bumps up were related to acquisitions.  

The company managed to grow its dividends by 6.40%/year over the past decade. The company's latest dividend increase was announced in April 2022 when the Board of Directors approved a 6.60% increase in the quarterly dividend to $1.13/share.

The dividend payout ratio has increased from 62% in 2012 to 64% in 2022. The ability to generate strong cash flows, have enabled Johnson & Johnson to reward shareholders with higher dividends for 60 consecutive years. I believe that the dividend is safe today, but will likely be limited to future growth in earnings per share of 5% - 6%/year over the next decade. A lower payout is always a plus, since it leaves room for consistent dividend growth and minimize the impact of short-term fluctuations in earnings.

Currently, the stock is fairly valued at 15.30 times forward earnings, yields 2.75% and has a forward dividend payout ratio of 40%. 

Relevant Articles:

- Dividend Kings for 2023

- Dividend Aristocrats Raises in 2023

- 36 Dividend Aristocrats for further research

- Dividend Achievers and High Return on Equity

Four Dividend Growth Stocks Delivering Dividend Raises to Shareholders

As part of my review process, I monitor dividend increases every week. I compile the list each week, but focus my attention on companies with a ten year track record of annual dividend increases or longer. I am looking for companies that have managed to grow dividends through a typical full length economic cycle of a boom and bust. A ten year requirement for dividend increases weeds out a lot of cyclical companies. It helps me focus on those who have a higher likelihood of future increases.

The fun doesn't stop there however. I review the recent increase relative to the historical record - meaning the past 5 or 10 years. Next, I review the trend in earnings per share, in order to determine if dividend growth is sitting on a stable foundation. I want a business that can grow earnings per share and grow dividends per share from there. I do not want a business that grows dividends by increasing the dividend payout ratio, as that is unsustainable for dividend increases and the business as a whole. I also want a dividend payout ratio that is sustainable, and generally staying within a tight range over time.

Next, I am going to review valuation. Even the best company in the world is not worth overpaying for. In my case, valuation means looking at P/E ratios and dividend growth rates. I try to account for how defensible the business is, whether I already have a position (and its size), and compare different options out there by yield/growth when I am ready to pull the trigger.

Over the past week, there were four companies that raised dividends to shareholders. All have managed to increase dividends for at least ten years in a row:

Aon plc (AON) is a professional services firm, provides advice and solutions to clients focused on risk, retirement, and health worldwide. 

Aon increased quarterly dividends by 9.80% to $0.615/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 13.40%. The five year annualized dividend growth is at 9.20%.

Between 2013 and 2022, the company has managed to grow earnings from $3.57/share to $12.23/share.

The company is expected to earn $14.63/share in 2023.

The stock sells for 22.18 times forward earnings and yields 0.76%.

Agree Realty Corporation (ADC) is a publicly traded real estate investment trust primarily engaged in the acquisition and development of properties net leased to industry-leading retail tenants. 

Agree Realty raised quarterly dividends by 1.20% to $0.243/share. This is also a 3.84% raise over the dividend paid during the same time last year. This is the eleventh consecutive annual dividend increase for this dividend achiever.

Over the past decade, the company has managed to increase dividends at an annualized rate of 5.70%. The five year annualized dividend growth is at 6.70%.

Between 2013 and 2022, the company has managed to grow FFO from $2.12/share to $3.47/share.

The company is expected to generate $3.95/share in FFO in 2023.

The stock sells for 16.72 times forward FFO and yields 4.40%.

The Procter & Gamble Company (PG) provides branded consumer packaged goods worldwide. It operates through five segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care. 

Procter & Gamble raised quarterly dividends by 3% to $0.9407/share. This dividend increase will mark the 67th consecutive year that P&G has increased its dividend and the 133rd consecutive year that P&G has paid a dividend since its incorporation in 1890. The company is a member of the elite dividend kings list.

Over the past decade, the company has managed to increase dividends at an annualized rate of 5%. The five year annualized dividend growth is at 5.70%.

Earnings per share have increased from $3.66 in 2012 to $5.81 in 2022. The company is expected to generate $5.86/share in earnings in 2023.

The stock sells for 25.77 times forward earnings and yields 2.50%. Check my review of Procter & Gamble here.

Star Group, L.P. (SGU) sells home heating and air conditioning products and services to residential and commercial home heating oil and propane customers in the United States

Star Group raised dividend by 6.60% to $0.1625/share. This is the eleventh consecutive annual dividend increase for this dividend achiever.

Over the past decade, the company has managed to increase dividends at an annualized rate of 6.80%. The five year annualized dividend growth is at 6.80%.

The stock sells for 15.37 times forward earnings and yields 5.05%.

Relevant Articles:

- Four Notable Dividend Increases From Last Week

- Three Dividend Growth Stocks Rewarding Shareholders With Raises

- Eight Companies Working Hard For Their Stockholders

- Nine Dividend Stocks Rewarding Patient Shareholders With A Raise