I review the list of dividend increases every single week, as part of my monitoring process. This process helps me check the pulse of the dividend growth investing universe.
It's helpful to monitor developing trends in newer companies, and to monitor trends in more established ones as well. The dividend increase provides strong signaling signal to me, as to the direction of the business. It's particularly helpful when compared to historical averages. For even more context, it's helpful to take it one step further and review ten year trends in financials such as earnings per share, dividends per share, dividend payout ratios etc. Last but not least, you have to look at valuation, which is more art than science.
Anyways, last week there were 41 companies in North America that raised dividends to shareholders. Twenty of these companies have a minimum ten year streak under their belts. The companies include:
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.
