Dividend Stock Analysis of Kroger (KR)

The Kroger Co. (KR) operates as a retailer in the United States. The company operates supermarkets, multi-department stores, marketplace stores, and price impact warehouse stores. 

Kroger is a dividend achiever, which recently hiked quarterly dividends by 23.80% to 26 cents/share. This marked the 16th consecutive year of annual dividend increases for the company.

Warren Buffett has also been slowly building up a position in Kroger.

During the past decade, Kroger has managed to grow dividends at an annualized rate of 13.80%.

Kroger managed to grow earnings per share from 95 cents/share in 2009 to $2.17/share in 2022. The 2018 numbers are adjusted to exclude the gain on sale of Kroger’s convenience store business. The company is expected to generate $3.91/share in 2023 and $4.04/share in 2024.

Last year was a nice bump in earnings, given the fact that earnings per share had gone nowhere since 2015. That was due to investments in the company’s business going forward. It appears that earnings went lower in 2021 as fewer consumers stock up on goods like they did at the beginning of the pandemic.

Kroger's financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.

The grocery business is highly competitive, with Kroger competing against the likes of Wal-Mart and Target, as well as mom and pop grocery stores, as well as the likes of Amazon. The company needs to continuously invest in stores, drive efficient operations, new products and innovation ( such as online, and delivery/pick up). Kroger does have the scale of operations to effectively compete, and also has attractive store locations. This allows it to be able to do online purchase and pick up at 57% of its stores and home delivery for 91% of customers. Back in 2018, Kroger invested in Ocado, which is its exclusive grocery delivery partner in the US. Ocado delivers groceries in Europe. Kroger has also made investments in new warehouses, store optimization, expanding its own private label brands and digital, in an effort to drive long-term sales growth. Same store sales growth and cost reductions are the drivers that will propel earnings per share growth over time.

Kroger is also competing by offering a large variety of private label brands that it owns and manufactures internally. This allows it to generate very good profit margins on these items relative to branded products.

Kroger also competes by including pharmacies in order three-quarters of its stores and a gas station in over half of its locations. Customers who fill in a prescription by getting in the store are also likely to make another purchase or two. The same goes for customers who would appreciate the convenience of shopping for gas, filling prescriptions and doing their grocery shopping.

Kroger is also planning to develop alternative revenue streams using the data it collects on shoppers, targeting personal finance products and media ad revenues. The company collects a lot of date on customers that shop there, which can also be used as a tool to provide a more personalized shopping experience. Another alternative revenue stream is the Home Chef meal delivery service, which provides ingredients for meals in 48 states in the United States. Kroger acquired Home Chef in 2018, and the meal kits are available at Kroger locations, including a few Walgreen’s stores.

Kroger has rewarded shareholders handsomely with dividends and share buybacks. Between 2009 and 2022, the number of shares outstanding has gone down from 1.31 billion shares to 754 million shares. This means that shareholders from 2009, who stayed invested in Kroger, increased their ownership in the company by two-thirds without doing anything.

The dividend payout ratio increased from 17.90% in 2009 to 36% in 2022.  A lower payout ratio provides an adequate margin of safety in the dividend payment, which can provide protection against short-term turbulence in earnings per share. There is room for increase in the payout ratio from here. Future dividend growth can be helped by a gradual increase in the payout ratio. If Kroger is unable to jump start earnings growth however, there will be a natural limit to further dividend growth. I would get worried if earnings are not growing, but dividends are, and the payout ratio exceeds 60%. 

Currently the stock is attractively valued at 12.18 times forward earnings and offer an attractive dividend yield of 1.76%.

Relevant Articles:

- Three Dividend Achievers Distributing More Cash to Shareholders
- Does Paying a Dividend Reduce a Company’s Value?
- Attractively Valued Dividend Contenders To Consider
- Supervalu (SVU) Dividend Stock Analysis

Sysco Corporation (SYY) Dividend Stock Analysis

Sysco Corporation (SYY) markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry in the United States, Canada, the United Kingdom, France, and internationally. It operates through three segments: U.S. Foodservice Operations, International Foodservice Operations, and SYGMA.

The company is a dividend king with a 50-year history of annual dividend increases. During the past decade, Sysco has managed to boost dividends at an annualized rate of 5%.

The last dividend was in November 2019, when Sysco hiked quarterly dividends by 15.40% to 45 cents/share

Between 2009 and 2019, Sysco has managed to boost earnings from $1.77share to $3.20/share. Growth wasn’t even, as most of it occurred in the past five years. The first five years were largely flat in terms of earnings per share growth. The company was expected to earn $3.79/share in 2020, before Covid-19 hit. Now, earnings are expected to hit $2.07/share in 2020 and $2.38/share in 2021.

The company has solid competitive advantages in the distribution business, due to its scale of operations. This lets it sell each unit to customers at a lower per unit cost – because it gets to spread costs over a larger base.

In addition, it has some scale in purchases, which also result in better prices, and higher margins. Being the largest distributor, and being closer to clients can lead to better margins that competitors.
In addition, Sysco has tried to focus on cost containment, process improvement in order to improve competitiveness and increase margins. Some examples of cost containment include centralizing purchasing for its distribution centers, eliminating 10% of corporate workforce.

The company is also trying to grow through acquisitions in the US and abroad. While it won’t have the same scale and competitive advantage abroad as it does in the US, this is still a good start. Getting new customers is also something it is trying to achieve, and it tries to offer services and consulting to clients that smaller scale distributors cannot do. Sysco also has half of its orders placed electronically by customers, which frees some time for the sales team to do value added services and look for new business opportunities.

The company distributes private label products and branded products to customers. The private label ones carry better margins for Sysco.

There are risks to investing in Sysco of course, notably labor shortages, food inflation, and recessions. It is difficult to find qualified truck drivers, which compresses margins. In addition, food inflation may make it difficult to quickly pass costs to customers, which may depress margins. A decrease in the economic activity may results in less of a demand for Sysco’s distribution of goods. Integrating acquisitions could also turn out to be more costly than expected.

The largest risk today is that a lot of their customers are having difficulties, due to Covid-19 related shutdowns. It is possible that many of their customers may not survive. The ones that are adaptable however, should be able to weather the storm.

Sysco may also benefit, because some of its smaller and less capitalized competitors may not survive, which could result in the opportunity to further consolidate its market position, and make it even stronger.

The company has been actively repurchasing shares during the past decade. The number of shares outstanding has been reduced from 596 million in 2009 to 523 million in 2019. It looks like the reduction in shares outstanding was more pronounced in the past five years, which is probably one of the reasons behind the growth in earnings per share during the period as well.

The dividend payout ratio increased from 2009 to 2015, before falling to a more reasonable 48% in 2019. Based on forward earnings, the forward dividend payout ratio is at 87%. This is high, but if you believe that this crisis is relatively temporary in nature, it may be a good time to review the stock.

The stock is selling for 27.50 times forward earnings and yields 3.50%. There will be an earnings hit in 2020, which means that the stock multiple looks high. Based on prior year's earnings, Sysco looks like a steal. If you believe that there will be a recovery in the restaurant industry, and that this health crisis will dissipate soon, today may be a good time to start reviewing the company. There is a pent-up demand, where customers will want to go out, and treat themselves to a meal prepared by someone else, in an environment that is not their home.

However, if this turns out to radically change how everyone does business, leading to a wave of closures, and a reduction in demand, Sysco may end up earning less money and its dividend may be in danger. As usual, the stock price can always move lower, which is a risk particularly when fundamentals are on a shakier ground due to specific industry risks that Covid-19 is causing to Sysco.

Relevant Articles

- Dividend Kings For 2020
- 36 Dividend Aristocrats On My Shopping List
- Nine Dividend Growth Stocks With Growing Yields on Cost
- Best Dividend Stocks For The Long Run – 10 years later
- Dividend Aristocrats List for 2020

Thirty-One Dividend Aristocrats for Further Review

We have had a turbulent week on Wall Street last week. It also sounds like the upcoming week would be turbulent as well. As a result, I decided to run my screening criteria against the list of dividend aristocrats, in order to uncover hidden gems for further research.

My screening criteria include:

1) A 25 year track record of annual dividend increases ( being a Dividend Aristocrat covers that easily)
2) A forward P/E below 20
3) A dividend payout ratio below 60%
4) Annualized dividend growth exceeding 3% over the past decade

After applying these criteria, I ended up with a list of 31 dividend aristocrats for further research. The list can be viewed below:

This list is not a recommendation to buy any securities. It is just a list of companies for further research. I apply my quantitative and qualitative measures when I review each company in detail. I review the trends in earnings, revenues, dividends, payout ratios and try to understand the general direction in the company’s financials. I also try to understand the company’s business model, and see if it has any competitive advantages. It is important to determine how sustainable the income stream would be throughout the ups and downs in the economic cycle, in order to determine dividend safety. Check my analysis of Johnson & Johnson (JNJ) for more information about the company, and the process I use to review individual companies.

For example, I like companies that grow earnings per share. Rising earnings per share provide the fuel behind future dividend increases. They are important sources of future dividend growth, and provide an added margin of safety to an already well covered dividend from a low payout ratio. In a perfect world, earnings and dividends will increase at a steady clip. In reality, the rate of growth ebbs and flows.

I also view valuation as a process where you review P/E ratios with past growth and growth estimates, while also thinking about the sustainability of the earnings stream. You may like this article on how to value dividend stocks.

As part of this exercise, I also decided to stress test my assumptions, and outline the companies that sell for more than 20 times forward earnings. While I looked for a payout ratio of 60% or lower, I required a higher annualized dividend growth rate. I focused on companies with an annualized dividend growth rate of 6% or higher.

I did this exercise, because I like to think beyond dividend screens. Some of my best ideas have come from outside screening the world of dividend aristocrats and dividend champions. The ultimate test is identifying a great company that is running along on all measures, and initiating a position at the right price.

I also view this list as a possible source of good ideas if the stock market continues going downhill. If that were to happen, a lot of great quality companies that are often overvalued would finally come down to earth. Investors would be able to scoop them up at bargain prices. Since these quality companies are seldom cheap, buying them may be a priority over buying the companies that are often on the cheap list.

Again, this list is just a starting ground for further research. I can tell you from that start that while Wal-Mart (WMT) made it on this list, I would not invest in it today, given the inability to grow earnings per share since 2013. In addition, its dividend growth has been very low since 2013. This is why it is important to look at each company in detail, in order to understand if it is a good idea today, or if its best days of growth were behind it.

Relevant Articles:

- How to value dividend stocks
- How to become a successful dividend investor
- How to read my stock analysis reports
- Screening The Dividend Champions List For Bargains

Simon Property Group (SPG): A High Yield and High Risk REIT

Simon Property Group (SPG) is a global leader in the ownership of premier shopping, dining, entertainment and mixed-use destinations. Its properties across North America, Europe and Asia provide community gathering places for millions of people every day and generate billions in annual sales. I will analyze it using the guidelines for analyzing REITs that I have outlined before.

Simon Property Group has managed to increase dividends for 9 years in a row. The last dividend increase occurred in July 2019, when the Board of Directors increased the quarterly dividend to $2.10/share. This was a 5 cent increase over the prior dividend amount and a 5 percent increase over the distribution paid during the same time the previous year. If the streak of dividend increases continues, Simon may be able to join the elite group of 400 or so dividend contenders and dividend achievers. The REIT cut dividends in 2009 during the financial crisis, after raising them for about 8 years beforehand.

During the past decade, Simon Property Group has managed to increase dividends at an annualized rate of 8.80%. The historical rate of dividend growth seems favorable, even if we account for the dividend cut from 90 cents/share to 60 cents/share in 2009. It would be interesting to see how the dividend holds up, given the headwinds in the retail sector and malls/shopping centers.

Between 2008 and 2018, FFO/share has increased from $6.45/share to $12.13/share. Simon Property Group is expecting to generate FFO/share in 2019 in the $12 - $12.05/share range. The financial crisis resulted in a 20% decrease in FFO/share. I hope that management will not cut dividends during the next 20% decrease in FFO/share, even if the payout ratios are sustainable.

Developing new properties, raising rents and reducing costs are just a few ways in general to grow FFO/share. With the supposedly difficult environment for retail and malls, it is going to be difficult to grow by expanding too much. Another way to grow is by making acquisitions, which may result in synergies.

The company’s tenant base seems adequately diversified. It’s properties are also viewed as high quality, with average sales per square foot exceeding $650, and average rents hovering around 10 -12% of that figure.

Most retail malls have two types of tenants, anchor tenants and inline tenants. Anchor tenants are the key tenants with large stores and big names in the business. Anchor tenants attract other smaller tenants and customers to the mall. Smaller customers benefit from the traffic that anchor tenants draw to the mall. Anchor tenants pay lower rents and enter into long-term lease duration compared to inline tenants.

In Simon’s case, inline tenants pay anywhere between $50 to $65 per square foot. Anchor tenants pay around $4 to $8 per square foot.

Here is a listing of the top 10 inline lessees, which account for 17% of total revenues and 8.70% of square footage.

The largest anchor tenants are listed below:

These anchor stores account for 31% of square footage but less than 2% of total revenues. It is interesting to note that if these retailers fail, and the space can be re-leased to smaller stores, rental income may increase provided that foot traffic doesn’t materially decrease. After all, a major anchor retailer would fail due to lower foot traffic in the first place, that is not providing valuable foot traffic to the inline stores in the first place. Therefore, it may be a positive that the likes of Sears for example have failed. Using that space for other purposes could unlock hidden value potentially.

Decreasing interest rates have been a tailwind for Simon Property Group, as it has allowed the real estate investment trust to refinance to lower rates and to pick up projects at a lower cost of capital. The company has a conservative balance sheet, which is why it has enjoyed an advantage in cost of capital versus peers. It has a good credit rating, and debt maturities are staggered well.

Increasing investments abroad could be another potential tailwind, as is opening new centers or renewing leases or signing up tenants at higher rates. Redevelopments could also refresh properties, and result in an increase in traffic, rents and tenant interest.

The occupancy rates increased since the financial crisis until hitting a peak at 97% in 2014. Since then, occupancy rates have been somewhat steady around 95%. The financial crisis impacted everyone and the whole economy. The challenges ahead for REITs like Simon seem to be structural, due to changes in the way US consumers shop. The US retail market is overdeveloped, which may not bode well for future occupancy rates, at a time when shopping patterns change, and online becomes a bigger competitor from before.

The FFO payout declined from 55% in 2008 to 48% in 2011. This was due to a combination of dividends cuts and FFO declines. I do not believe the FFO Payout ratio was that aggressive in 2009, in order to cut the dividend. But management, perhaps due to high debt levels and in an effort to preserve liquidity decided to cut distributions at this time, even if they didn’t have to. Simon Property Group was one of the REITs that paid a large share of their distributions in the form of extra shares in the dark days of 2009, instead of providing cash to shareholders. They also resorted to selling stock at the time.

The FFO payout ratio has been increasing steadily from the lows in 2011 to around 65% in 2018. Based on forward FFO projections and the latest dividend increase, the forward FFO payout ratio is at 70%. While there is some margin of safety in the distributions, I do not think that high payouts are justified for companies like Simon. This is no Realty Income that operates under long-term triple-net leases. FFO/share is not expected to grow for the near future, which means that there could be a natural ceiling to dividend growth. I have believed that lack of earnings, or in this case FFO growth, could be a risky sign in terms of dividend safety.

The number of shares outstanding increased between 2008 and 2010, from 222 million to 291 million. This is one of the situations where shares were being given away at fire-sale prices when things were tough. Obviously, that is bad capital allocation. The number of shares outstanding ultimately peaked at 313 million in 2016, and have been going downwards very very slowly.

Simon Property Group is cheap today at a little over 12 times forward FFO/share and a juicy dividend yield of 5.60%. This is a good value in an environment where value is hard to find. Of course, the reason for the good valuation is that there is little FFO growth expected, and due to headwinds from the troubles of US retailers. There are some opportunities for growth, but also some opportunities for things to go wrong as well. You have to decide for yourself if the entry price justifies the risk you are taking, and if the potential return is sufficient to compensate for said risk. FFO/share is not expected to grow for the near future, which means that there could be a natural ceiling to dividend growth.

The situation does seem similar to Tanger (SKT), which also yielded 5% in 2017, but the stock was about to fall by 40%, while FFO/share and dividend growth flattened out. Of course, Tanger never cut dividends in its history, but both companies are connected to their founding families, which is usually a plus.

Relevant Articles:

- Tanger Factory Outlets (SKT) Dividend Stock Analysis
- Dividend Achievers versus Dividend Contenders & Champions
- Five Things to Look For in a Real Estate Investment Trust
- Twelve Companies Raising Dividends To Their Investors

Fastenal Company (FAST) Dividend Stock Analysis

Fastenal Company (FAST), engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, and internationally. It offers fasteners, and other industrial and construction supplies under the Fastenal name. The analysis of Fastenal was posted to readers of my Dividend Growth Investor Newsletter on September 30, 2019 when the stock was at $32.67/share.

Fastenal is a dividend achiever with a 21-year track record of annual dividend increases. The last dividend increase occurred in July 2019, when management raised its quarterly dividend by 2.30% to 22 cents/share. This was the second dividend increase over the past year however. There was a 7.50% dividend increase in January 2019. Overall, the new dividend is 10% higher than the distribution paid during the same time last year. I would continue monitoring the dividend increase developments for any continuation or deceleration in the dividend growth rate.

During the past decade, Fastenal has managed to boost dividends at an annualized rate of 19.50%. I would expect this rapid growth to slow down to possibly below 10% (more like a 7% - 10% range) over the next decade. Rising earnings per share will provide the fuel behind future dividend increases, given the payout ratio today (please see below)

Fastenal has managed to grow earnings per share over the past decade, which provided the fuel behind dividend increases. Fastenal earned $1.31/share in 2018, which was a good increase from the 47 cents/share it earned in 2008. It is notable to see that earnings per share did decrease in 2009 to 31 cents/share, before rebounding in 2010 to 45 cents/share. The company is expected to generate $1.37/share in 2019.

The company can grow by opening new branches to distribute products, increase sales at existing locations. The principal competitive advantages for Fastenal are its customer service, price, product availability, and convenience.

Growth can be achieved by further expansion abroad, while location growth in the US will be more limited. International accounts for 14% of sales, with the majority of international sales from Canada and Mexico. Having an installed base of vending machines and on-site locations at customer places of business is a great way to get foot in the door and generate recurring revenues ( albeit subject to the cyclical nature of industries it serves). Being part of the customer process embeds Fastenal there, which is a competitive advantage., which can drive incremental revenues. Other growth area includes inventory management services. That could mean more business for Fastenal, which could further its scale and help it offer even more products in its catalogs. The company’s scale is a competitive advantage, both in sourcing and distribution.

Taking share from smaller distributors is another way to capture a bigger market share, and grow revenues. As its customers consolidate, they would require a distributor with a better reach in the US, in order to consistently serve the account. Fastenal offers fast delivery to 90% of products, which is great for its customers, who know they will be taken care of quickly.

Fastenal’s customer base exposes it to the cyclical nature of this client base. Tariffs could be bad for the customers and for Fastenal, as it sources its products from abroad, including China. Tariffs and trade tensions could squeeze margins, as it would increase costs and put pressure on revenues too. Fastenal can pass some cost increases to customers of course, but in a competitive environment, this could be difficult.

The dividend payout ratio increased from 28% in 2008 to 59% in 2018. The doubling of the payout ratio is one reason why dividend growth exceeded the high earnings growth over the past decade. I do not think that there is a lot of room left for further expansion of the payout ratio. A lower payout ratio is a plus, since it provides a margin of safety against temporary declines in earnings.

Fastenal also started repurchasing shares around 2014, reducing the number of shares by almost 4% to 574 million shares. It would be interesting to see if they do more share buybacks in the future as a way to manage earnings per share. It is great to see a company that doesn’t engage in financial engineering in order to reduce shares outstanding at any cost and increase earnings per share at any cost. I like that Fastenal has been able to grow the earnings per share the old fashioned way – by actually growing the business.

Right now the stock is selling at 26.90 times forward earnings and offers a defensible yield of 2.35%.

Relevant Articles:

- Nine Companies That Love To Raise Their Dividends
- MSC Industrial Direct (MSM) Dividend Stock Analysis
- Seven Dividend Growth Stocks Rewarding Shareholders With a Raise
- Time in the market is your greatest ally in investing

MSC Industrial Direct (MSM) Dividend Stock Analysis

MSC Industrial Direct Co. (MSM) distributes metalworking and maintenance, repair, and operations (MRO) products in the United States, Canada, and the United Kingdom.

MSC Industrial Direct is a dividend achiever with a 16-year track record of annual dividend increases. The last dividend increase occurred in July 2019, when the company raised its dividend by 19% to 75 cents/share. Two of MSC Industrial Direct’s competitors include W.W. Grainger (GWW) and Fastenal (FAST).

The company has managed to grow earnings per share at a decent clip over the past decade. Earnings per share went up from $3.05 in 2008 to $5.80 in 2018. The company is expected to earn $5.24/share in 2019. I like the consistency of earnings per share over the past decade.

A large part of growth over the past decade was accomplished through acquisitions. However, they have not always added directly to the bottom line. However, they have increased the company’s scale, and diversified operations into new end markets. A big jump in earnings per share occurred in 2018, after corporate tax rates were lowered, which resulted in higher earnings per share. A potential area of growth include international operations, with MSC recently creating a partnership in Mexico. MSC Direct has some operations in the UK and Canada, which could be opportunities for future development as well.

MSC Direct can take market share from smaller competitors, as it offers better pricing and better variety of SKUs to clients. In addition, it tries to integrate in client operations. Some examples include providing of inventory management solutions to customers, performing the procurement process for customers, keeping inventory at the client locations. This creates stickier relationships with the customers. MSC Direct also has industry specialists to provide clients with process improvement and efficiency initiatives, and assist with technical issues.

While the business is very competitive, and has grown through acquisitions, the possibility that the company gets acquired by one of its larger peers is low. That’s because a large portion of the voting power (and ownership as well) with consolidated by the Jacobsen family, which has founded and operates the business. On the other hand, this could be a blessing, because the ruling family could operate with a focus on long-term lasting and sustainable growth. It is generally good to have management whose incentives are aligned with the long-term well being of the business.

As usual, Amazon is a potential threat for companies like MSC Direct. However, it can differentiate itself by offering a focused set of solutions to its clients. Specialization is a competitive advantage to a certain degree, versus a competitor that is large, but is becoming a jack of all trades. MSC Direct also has 99% of the SKUs offered in stock, and offers one day delivery to clients. Although the barriers of entry in competing with the likes of MSC direct are low, it takes some time to build the relationships with customers.

At the same time, shares outstanding remained at around 63 million between 2008 and 2013. Only since 2014 did MSC Industrial Direct start to do some share buybacks, though at a very slow pace.

Over the past decade, the company has managed to grow dividends at an annual rate of 12%/year. This is faster than the growth in earnings per share. I would expect that future dividend growth over the next decade will be closer to 7%/year.

An interesting fact about the company is that it has tended to issue special dividends to shareholders on a few occasions. The last one was a $3/share special dividend in 2015, preceded by a $1/share special dividend in 2011. The first special dividend of $1.50/share was declared and paid in 2005. The company has as shareholder friendly capital allocation strategy, which grows the business while also sending more cash to shareholders in the form of dividends, special dividends and share buybacks.

The dividend payout ratio grew from 24% in 2008 to 38% in 2018. This was possible due to the fact that dividends grew faster than earnings per share. That being said, there is still room for slightly faster growth in dividend payments over earnings.

Right now, the stock seems attractively valued at 13.60 times forward earnings and yields 4.20%.  This investment idea for further research was first featured in the Dividend Growth Investor Newsletter.

Relevant Articles:

- Nine Companies That Love To Raise Their Dividends
- A Record Week for Dividend Increases
- Dividend Achievers Offer Income Growth and Capital Appreciation
- Twelve Dividend Machines Boosting Dividends

Best Dividend Stocks For The Long Run – 10 years later

Exactly a decade ago, I wrote an article that outlined the best dividend stocks for the long run. I have used the criteria to create this list in my newly started dividend investing newsletter.

The article from a decade ago had a few simple ideas behind it:

1) Buy and hold works, which is why it makes sense to hold stocks for the long run.

2) Owning quality companies is important. A history of consistent dividend increases shows a company which is good at capital allocation and has a business model worth studying

3) Purchasing equities at attractive valuation is as important as selecting great companies with outstanding fundamentals. Even better, it was a perfect time to be buying equities at the depth of the Great Recession

4) Diversification is important – while I looked for strong companies with durable business models, I also wanted to avoid concentrating too much on a single sector. An ounce of prevention is worth a pound of cure.

5) Dividends are a key component of investor returns. Dividends are more stable and reliable than share prices, and are easier to forecast. The portfolio has an average yield of close to 3.50% in 2008, with a low P/E ratio and a low dividend payout ratio. While there were some cuts along the way, the dividend income was sufficient for an imaginary retiree with a nest egg to

A decade ago I created a list of 40 dividend growth companies from a variety of sectors. The average P/E ratio was 11.70, and the average yield was 3.45%. The 5-year average dividend growth rate was over 15%/year. It was relatively “easy” in hindsight to find quality companies at depressed valuations back then. The only problem was that most individuals were scared of stocks, given the recession, growing unemployment, bank failures and the daily reminders of how tough things really are. I do believe that if you select the right businesses, and think like a business owner, you can do well over time as an investor. As we all know, by focusing on the passive dividend income, dividend investors can afford to ignore the news and stock market fluctuations. Investing for the long-term could pay off for the rare soul who has patience on their hands.

I created the list by studying companies in the dividend aristocrats and dividend achievers lists. While I was familiar with the list of dividend champions, I hadn’t utilized it as fully as I am today. The list is here:

Symbol	Name	Sector	Consecutive Years of Higher Dividends	5 year Dividend Growth	Yield	P/E	Div/Shr	Dividend Payout Ratio	Last Price
FDO	Family Dollar Stores	Consumer Discretionary	32	11.32%	2.10%	14.77	0.5	30.12%	24.51
MCD	McDonald's Corp	Consumer Discretionary	32	43.94%	3.30%	15.31	2	50.51%	60.59
MHP	McGraw-Hill Companies	Consumer Discretionary	35	9.87%	3.80%	9.07	0.88	34.51%	23.14
SHW	Sherwin-Williams	Consumer Discretionary	30	17.78%	2.60%	12.76	1.4	32.18%	55.53
VFC	VF Corp	Consumer Discretionary	36	20.86%	4.60%	9.1	0.59	40.48%	13.265
CLX	Clorox Co	Consumer Staples	31	9.39%	3.50%	15.6	1.84	54.12%	53.04
KO	Coca-Cola Co	Consumer Staples	46	9.34%	3.40%	17.32	0.76	59.14%	22.285
CL	Colgate-Palmolive	Consumer Staples	45	11.27%	2.70%	16.99	0.8	45.85%	29.61
KMB	Kimberly-Clark	Consumer Staples	36	10.81%	4.50%	12.58	2.32	56.59%	51.53
PEP	PepsiCo Inc	Consumer Staples	36	19.72%	3.20%	14.82	1.7	48.43%	52.03
PG	Procter & Gamble	Consumer Staples	52	11.07%	2.70%	15.7	1.6	42.67%	58.94
SYY	Sysco Corp	Consumer Staples	38	13.81%	4%	11.95	0.88	47.83%	21.92
WMT	Wal-Mart Stores	Consumer Staples	34	20.28%	1.70%	15.81	0.95	27.46%	54.63
ADM	Archer Daniels Midland	Consumer Staples	33	15.13%	1.90%	7.12	0.52	13.90%	26.6
HRL	Hormel Foods Corp.	Consumer Staples	43	14.49%	2.70%	14.1	0.19	36.54%	7.34
CVX	Chevron Corp	Energy	21	11.63%	3.30%	6.85	2.6	59.41%	79
XOM	Exxon Mobil	Energy	26	8.64%	2%	8.7	1.6	17.32%	80.45
BP	British Petroleum	Energy	7	11.45%	7.10%	5.2	3.36	37%	47.04
AFL	AFLAC Inc	Financials	27	25.02%	2.70%	13.95	0.56	37.71%	20.72
CINF	Cincinnati Financial	Financials	48	10.30%	5.40%	10.97	1.56	56.73%	30.2
STT	State Street Corp	Financials	27	11.14%	2.50%	8.51	0.96	21.92%	37.24
CBSH	Commerce Bancshares	Financials	40	10.05%	2.60%	16.52	0.585	40.32%	25.13
CB	Chubb Corp.	Financials	43	11.50%	2.80%	8.96	1.32	24.09%	49.07
BDX	Becton, Dickinson	Health Care	36	21.75%	2%	14.35	1.32	29.60%	63.99
JNJ	Johnson & Johnson	Health Care	46	13.60%	3.20%	12.97	1.84	41.63%	57.25
MDT	Medtronic, Inc	Health Care	31	14.78%	2.40%	15.32	0.75	38.46%	29.91
MMM	3M Co	Industrials	50	8.89%	3.60%	10.6	2	37.81%	56.04
EMR	Emerson Electric	Industrials	52	8.96%	4.10%	10.59	1.32	43.14%	32.36
GWW	Grainger (W.W.)	Industrials	37	15.58%	2.40%	11.62	1.6	27.03%	68.74
ITW	Illinois Tool Works	Industrials	45	18.49%	4%	9.45	1.24	37.46%	31.3
TFX	Teleflex Inc	Industrials	31	11.40%	3%	11.04	1.36	32.46%	46.27
UTX	United Technologies	Industrials	14	18.03%	3.30%	10.27	1.54	32.42%	48.82
DOV	Dover Corp.	Industrials	53	22.23%	3.50%	8.68	1	29.33%	29.63
ADP	Automatic Data Proc	Information Technology	34	20.42%	3.50%	16.42	1.32	56.65%	38.27
APD	Air Products & Chem	Materials	26	13.60%	3.60%	11.71	1.76	42.41%	48.59
VAL	Valspar Corp	Materials	27	13.13%	3.60%	12.77	0.6	43.48%	17.63
NUE	Nucor Corp.	Materials	34	77.90%	3.20%	6.31	1.4	20.06%	44.04
ATO	Atmos Energy Corp	Utilities	21	1.62%	5.80%	11.75	1.32	66%	23.47
ED	Consolidated Edison	Utilities	34	0.83%	6%	8.54	2.34	51.43%	38.88
BKH	Black Hills Corp.	Utilities	37	3.10%	5.60%	4.27	1.4	23.57%	25.37

Data s of Dec 12, 2008

So where are all these companies today? I decided to look and see how these companies are doing.

We had different things happen to each security. I adjusted the original numbers for stock splits, to calculate changes in dividend rates and total returns.

Symbol	2018 Dividends Per Share	Stock Price -12/14/18	Trailing P/E	2018 Dividend Payout	Dividend Increase	Total Returns (from a $10K investment)	DGI Notes
FDO						35,444.94	acquired by Dollar Tree in 2015
MCD	4.64	183.29	27.85	70.52%	132.00%	41,192.75
MHP	2.00	166.62	24.81	29.76%	127.27%	91,287.72	Changed symbol to SPGI
SHW	3.44	386.00	19.29	17.19%	145.71%	79,893.23
VFC	2.04	75.15	25.66	69.62%	245.76%	72,488.01	Dec 2013 - 4:1 stock split
CLX	3.84	164.52	25.63	59.81%	108.70%	42,023.60
KO	1.56	49.34	74.98	236.36%	105.26%	30,191.90	Aug 2012 - 2:1 stock split
CL	1.68	65.17	26.97	69.42%	110.00%	27,867.68	May 2013 - 2:1 Split
KMB	4.00	117.42	25.54	86.96%	72.41%	33,930.99
PEP	3.71	113.95	32.88	106.92%	118.24%	29,495.51
PG	2.87	96.64	25.25	74.93%	79.38%	22,567.50
SYY	1.56	65.45	23.21	55.32%	77.27%	41,085.48
WMT	2.08	91.85	52.46	118.86%	118.95%	21,587.45
ADM	1.34	44.61	11.07	33.25%	157.69%	21,408.01
HRL	0.84	44.57	23.96	45.16%	342.11%	73,386.08	Two @:1 stock splits in Feb 2011 and Feb 2016
CVX	4.48	113.83	15.32	60.30%	72.31%	20,877.73
XOM	3.28	75.58	13.9	60.29%	105.00%	12,470.64
BP	2.46	38.66	14.95	94.98%	-26.79%	13,948.37	Dividend cut in 2010
AFL	1.04	44.61	6.99	16.30%	85.71%	27,842.51	Mar 2018 - 2:1 stock split
CINF	2.12	79.41	9.48	25.30%	35.90%	40,166.25
STT	1.88	63.53	10.15	30.03%	95.83%	19,649.30	Dividend Cut in 2009, dividend recovered in 2012
CBSH	0.90	58.05	15.96	24.73%	53.85%	25,635.60	Annual 5% stock dividends paid
CB						30,173.40	Acquired by ACE LTD, which changed name to Chubb
BDX	3.08	231.45	385.75	513.33%	133%	43,542.16
JNJ	3.60	133.00	233.74	631.58%	96%	31,544.68
MDT	2.00	93.72	58.8	125.79%	167%	38,890.03
MMM	5.44	196.10	26.33	73.02%	172%	45,343.58
EMR	1.96	60.44	17.47	56.65%	48%	25,449.33
GWW	5.44	284.41	22.45	42.94%	240%	49,994.88
ITW	4.00	131.04	23.73	72.46%	223%	53,601.50
TFX	1.36	247.43	170.17	93.79%	0%	62,665.10	Dividend unchanged
UTX	2.94	118.80	19.09	47.27%	91%	30,930.71
DOV	1.92	76.32	16.27	40.94%	92%	48,109.88
ADP	3.16	134.82	34.76	81.44%	139%	52,300.08
APD	4.40	155.41	22.92	64.90%	150%	44,722.94
VAL						74,760.89	Acquired by Sherwin Williams in 2017
NUE	1.60	56.39	8.61	24.43%	14%	17,551.05
ATO	2.10	98.47	18.14	38.67%	59%	59,004.77
ED	2.86	83.83	16.78	57.20%	22%	32,805.65
BKH	2.02	66.66	16.34	49.51%	44%	38,349.55

Data as of Dec 14, 2018

You can view the tables in a spreadsheet from this location. You can download as excel from here. I added a field for yield on cost for the companies that are still active today.


Three companies ended up being acquired. Those include Family Dollar, Valspar and Chubb. They kept their streak of annual dividend increases up to the acquisition date.

Two companies ended up cutting dividends. These include State Street and British Petroleum.

No companies ended up failing outright after a decade.

34 companies raised dividends, which is 85% of the whole population of 40 companies. This figure excludes the three companies being acquired of course.

One company kept dividends unchanged – Teleflex.

I looked at total returns, between December 12, 2008 and December 14, 2018. A $400,000 investment, equally weighted between the 40 companies turned out to $1.6 million ten years later ( assuming dividend reinvestment).

The five best performing securities were:

The five worst performing securities were:

I would have never expected what the best and worst performers would be. It does seem interesting that the two dividend cuts we experienced are part of the worst performing equities.  Back in 2007 and 2008, energy companies were very hot, as we had fears of oil  prices going into the stratosphere.  After looking at the results, it is obvious that it is important to be diversified. The worst performers includes three energy companies.

The best performers include several dividend growth stocks that I have rarely seen in dividend growth investors portfolios. Several of these companies also ended up with high yields on cost. It is also important to try to own as many companies you can find, that make sense from a valuation and qualitative point of view. I do not subscribe to the idea of limiting yourself to 15 or 20 companies, because you supposedly find them to be your best ideas. I have found that my best ideas were when I expanded my portfolio size beyond 40 dividend paying stocks. It is also important to let companies do the heavy lifting for you, and not interrupt the compounding process unnecessarily. The itch to book a gain can be expensive in the long run. Timing the market and active trading are hazardous to your wealth and dividend income.

Ten years ago, the conditions were hard, which translated in great entry points for enterprising dividend investors. Future dividend income was essentially on sale when stock prices went down. 

As a result, the list of companies identified a decade ago has done well. It is a testament to the idea of selecting quality companies with long streaks of annual dividend increases, purchased at attractive valuations. It is also a testament to the idea of buy and hold investing and the idea of holding quality companies inside diversified dividend portfolios. The list of companies is not a recommendation today however. If I were to invest in new companies today, I would not pay more than 20 times earnings and I would only select the companies which have managed to grow earnings per share over the past decade. I use a variety of qualitative and quantitative factors in my investing.


Relevant Articles:

- Best Dividends Stocks for the Long Run
- 26 Dividend Champions For Further Research
- Dividend Kings List For 2019
- How to value dividend stocks