What to do about slowing earnings growth?

Successful dividend growth investing relies on finding companies at an attractive price which can grow earnings and dividends over time. A long track record of annual dividend increases is an indication of a strong business model that generates a lot of excess cash, beyond the needs for growing the business. This is the characteristic for most of those dividend champions, which shower their shareholders with more cash every year.

One of the monitoring tools at my disposal involves checking the list of dividend increases, and analyzing companies every 12 – 18 weeks. I have noticed that several of the companies I own have been unable to grow earnings per share over the past few years. Some recent examples include Coca-Cola, Procter & Gamble and Colgate Palmolive.

Some of it could be due to the changing competitive and business nature at an individual company basis. The other reasons for slowing earnings growth is due to external factors such as:

• The strong US dollar
• Weaker International Economic Growth
• Weak energy prices
• Higher Competitive Pressures

14 Dividend Champions for Further Research

The list of dividend champions includes companies which have managed to increase dividends every single year for at least 25 years in a row. This is a very rare occurrence, and is indicative of a company that has a unique business model that withstood the test of time. Only a company with a unique set of competitive advantages can manage to grow the business, maintain its dominant industry position, and shower shareholders with more cash every single year for at least a quarter of a century. As of the time of this writing, there are 109 such businesses in the US. The list of Dividend Champions is maintained by David Fish, who is a true superhero for ordinary dividend investors.

After obtaining the list every month, I try to get it to a more manageable level by weeding out companies whose dividends are at risk.

My screening criteria on the list of dividend champions includes:

1) P/E ratio at or below 20
2) Dividend Payout Ratio below 60%
3) EPS growth over the past decade
4) Dividend Growth exceeding 3%/year

The companies which met this criteria include:

John Bogle Likes Dividends

John Bogle is an investing legend. He is the founder of Vanguard Group, a $4 trillion dollar mutual fund powerhouse. Vanguard is credited for single handedly rolling out the first index mutual fund in 1976. It gave millions of investors around the world the opportunity to invest at a low cost.

I have read several of his books, and really enjoyed his simple messages. I really liked Bogle's message on keeping costs low, keeping turnover low, staying the course and keeping it simple. I liked the advice the minute I read it.

It makes sense that when you do not pay 1%/year to a greedy asset manager, you have more money working for you.

I have been inspired by Bogle to find a way to educate investors and help them get their fair share of returns. For example, building a diversified portfolio of dividend companies will only cost a one time brokerage fee. This means that the investor’s only cost is to buy the diversified list of blue chip stocks for their portfolio. Their job is to then remain patiently invested. That way, they will not have to pay an annual fee for the privilege of someone else picking well-known companies for their portfolios. After all, I do not need to someone else to buy Johnson & Johnson with my money, and charge me an annual fee in the process. This is a well-known business.

I especially liked Bogle’s advice on dividends. In his books, he discusses how share returns are dependent in three factors:

Why Holding 100% of Equity Investments in Taxable Accounts is a Mistake

One of the best vehicles for accumulating a nest egg for ordinary investors is the 401 (k). For most employees of large companies, they get the ability to contribute as much as $18,000/year, and get a tax break in the process. The money is then invested in those 401 (k) plans, and grows tax-free for decades, until it has to be withdrawn at retirement. At that point, the withdrawals are taxed as ordinary income for pre-tax plans, and not taxed for after-tax ones. This is the best way to invest for someone who holds a demanding day job, and spends a lot of time on family affairs, and is not able or willing to dedicate even 10 hours/week on their goal of retirement or financial freedom. This is the best way for probably 80% of employees out there. Those include most investors that probably have no clue about investing, economics, business, the difference between preferred stock and livestock, and are not going to spend the time or effort to learn about it. A very close relative of mine invests entirely in index funds in their 401 (k) and Roth IRA every month, and have ok over the past decade.

I have been thinking about it, and think that this is also a very good way to invest for the average self-directed investor. Basically, what I am trying to say is that the ability to defer taxes in a 401 (k) today, enjoy tax-deferred compounding for decades, and earn an employee match on contributions is a more advantageous place for your money than a taxable portfolio. This is because by investing in a taxable portfolio, you are essentially able to place much less money to work for you. In addition, in a taxable account your capital gains and dividends are taxed during your accumulation phase, when your total income is usually at its the highest. Thus, even a portfolio of the best dividend paying stocks has to perform at least a couple percentage points better per year, in order to keep up with the tax-advantaged performance of investments in a 401 (k). In my case, I am getting a 25% effective discount from my purchase price by investing through a tax-deferred account.

Two REITs Delivering High Growing Income for Retirees

As you know, I review the list of dividend increases every single week as part of my monitoring process. I usually focus my attention on the ones that have raised distributions every single year for at least a decade. Over the past week, there were two real estate investment trusts, which raised dividends for their shareholders. These are well known, and widely held Real Estate Investment Trusts (REITs). REITs are a great way to obtain exposure to real estate for DYI investors. The companies include:

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. Realty Income raised its monthly dividend to 21.10 cents/share. This REIT is a dependable dividend achiever which has rewarded shareholders with a raise for 23 years in a row. Realty Income calls itself “The Monthly Dividend Company”. This is a very well run REIT, whose sole purpose is to shower shareholders with monthly dividend checks. I really like the stability of the long-term triple-net type leases that Realty Income uses to rent out its properties. The long-term track record of dividend increases is very impressive.