I track the dividend investing universe for dividend increases every single week. This exercise helps me monitor existing holdings, and potentially identify companies for further research.
Dividend increases are important according to the dividend signaling theory. Dividend increases provide key information to the trained eye about the fundamental picture of the company, its business prospects and management sentiment.
As a Dividend Growth Investor, I typically focus my attention on the companies that raise dividends for at least ten years in a row. This is a requirement that helps me weed out a lot of the cyclical names that were simply present during a portion of an economic cycle. This requirement helps me focus on the companies that have the underlying economics to potentially keep delivering through the ups and downs of a typical cycle.
Over the past week, there were 49 companies that raised dividends. Nineteen of them also have a ten year track record of annual dividend increases under their belts. The companies include:
Just because a company raised dividends last week AND has a ten year track record of annual dividend increases, does not make it an automatic buy. It merely may put it on my list for further research.
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.
Relevant Articles:
- Twenty Dividend Growth Stocks Raising Distributions Last Week
