Right after the market closed on Monday, June 29, I learned that Simon Property Group (SPG) is cutting dividends per share. Simon is a real estate investment trust engaged in the ownership of premier shopping, dining, entertainment and mixed-use destinations. Check my analysis of Simon for more details about the REIT.
The company declared a dividend of $1.30/share, which is 38.10% decrease over the dividend paid during the first quarter of 2020. The Company expects to pay at least $6.00 per share in common stock dividends for 2020, in cash, subject to Board of Directors approval. Since Simon already paid $2.10 in February, this means that it plans to distribute two more payments of $1.30/share through the end of 2020. That's fine, since the REIT essentially skipped its dividend for the second quarter of 2020.
Back in May 2020, the company ended up being ambiguous on its dividend, as it failed to declare a payment for the second quarter. There were several things happening, namely the acquisition of Taubman (TCO), the Covid-19 shutdown of its properties, and the difficulty in collecting rent from tenants. Since then we have had no visibility on the amount of rent that is collected, but judging by other peers it is likely low. Hence why Simon is in the news for trying to sue tenants such as The GAP for not paying rent.
Simon is also trying to cancel the merger with Taubman, citing the Covid-19 situation and using the deterioration in business as a cause to walk away from this transaction. While it may have to pay a steep fine to walk away, Simon may actually be bluffing its way to bring Taubman to the negotiating table, and lower the entry price for the deal. We could only speculate of course.
I had a very small position in Simon, which I just sold today. That dividend cut ended a 10 year streak of annual dividend increases. Ironically, buying Simon when it last cut dividends in April-May 2009 would have turned out to be a smart decision through 2018. If we look at prices today however, the returns are not as high since early 2009.
I also wanted to add to my article from Friday, about expectations for dividend increases and dividend cuts in the banking sector.
It turns out that the results for the initial stress tests are out. It turns out that the following banks are going to keep dividends unchanged in the third quarter:
- Goldman Sachs (GS)
- Bank of America (BAC)
- Citigroup (C)
- Ally (ALLY)
- State Street (STT)
- U.S. Bank (USB)
- BNY Mellon (BK)
- Discover Financial Services (DFS)
- Fifth Third Bancorp (FITB)
- PNC Financial (PNC)
- American Express (AXP)
- J.P. Morgan (JPM)
Jamie Dimon, Chairman and CEO of JPMorgan Chase said: “At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the Firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positons. If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.
The only major bank that won't be keeping dividends unchanged is Wells Fargo (WFC). (Source)
"The company expects its common stock dividend in third quarter 2020 will be reduced from the current level of $0.51 per share. The company expects that the level of the third quarter dividend will be announced when it releases second quarter financial results on July 14, 2020."
On July 14th, Wells Fargo cut its quarterly dividend by 80% to 10 cents/share. Source: Press Release
This would be the first dividend cut for Wells Fargo since the Global Financial Crisis. Back in March 2009, the bank cut dividends as part of the TARP program. Incidentally, that was a great time to buy Wells Fargo below $10/share. The stock rebounded and went as high as $65 by early 2018, but has slowly gone downhill from there. Buffett is one of the largest holders of Wells Fargo, and is likely not very happy with the outcome. The bank was one of the strongest a decade ago, but its been mired in scandals related to fictitious account openings, and its size of operations has been capped.
I had a very small position in Wells Fargo. I built it in 2013, but stopped adding after raising some concerns that noone else paid attention to at the time. After all, if Buffett was buying, it was good enough. The nice part of my risk management procedures is that I usually build positions slowly, always doubt myseld and if the story changes, I stop buying more. When I am wrong, I like to keep losses low. I believe in keeping losses low, while trying to maximize future dividends and capital gains.
Relevant Articles:
- Wells Fargo Joins the Crowd of Dividend Cutters
- Should you invest in Wells Fargo (WFC)?
- Why Warren Buffett Likes Investing in Bank Stocks
- Simon Property Group (SPG): A High Yield and High Risk REIT
- Expect Dividend Cuts and Dividend Freezes in the Banking Sector
Tuesday, June 30, 2020
Monday, June 29, 2020
Three Dividend Stocks in the News
I review the list of dividend increases as part of my monitoring process. This helps me to see whether the companies I own continue to progress financially, as evidenced by a well supported dividend increase. A well-supported dividend increase is one that is derived from growing earnings per share over time, and a business that continues humming along nicely. A well-supported dividend increase is one where the payout ratio is not too high, but just right.
Reviewing the list of dividend increases also helps me to identify companies for further research. While I do my fair share of screening on the list of dividend champions, dividend aristocrats, achievers and contenders, I also prefer to look at individual stories. I invest using a bottom up approach, but also try to look at the big picture as well.
Over the past week, there were three companies that raised dividends:
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.
The Kroger Co.'s Board of Directors approved a dividend increase from 16 to 18 cents per quarter. Kroger's quarterly dividend has grown at a double-digit compound annual growth rate since it was reinstated in 2006. This marks the 14th consecutive year of annual dividend increases for this dividend achiever.
"Kroger's 12.50 percent dividend increase reflects our ability to deliver strong free cash flow during uncertain times and throughout the economic cycle," said Rodney McMullen, Kroger's chairman and CEO. "It also reflects the Board of Directors' confidence in both our business model and our commitment to return value to shareholders and achieve consistently attractive total shareholder returns."
Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 12.60%.
Kroger managed to grow earnings from 94 cents/share in 2009 to $2.04/share 2020. The company is expected to earn $2.71/share in 2021 and $2.56/share in 2022.
Kroger sells for 12.10 times forward earnings and yields 2.20%. Check my analysis of Kroger for more information about the company.
Hingham Institution for Savings (HIFS) is a Massachusetts-chartered savings bank located in Hingham, Massachusetts.
The bank announced that its Board of Directors has declared a regular quarterly cash dividend of $0.43 per share. This represents an increase of 2% over the previous regular quarterly dividend of $0.42 per share as well as a 10.20% increase over the dividend paid during the same time last year.
The company has consistently increased regular quarterly cash dividends over the last twenty-five years. The Bank has also declared special cash dividends in each of the last twenty-five years, typically in the fourth quarter.
Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 6.10%.
The bank has managed to grow earnings from $3.79/share in 2009 to $17.83/share in 2019. There are no earnings estimated for 2020 due to its small size, but trailing 12 month earnings are at 14.33/share.
The stock is selling for 11.10 times earnings and has a dividend yield of 1.10%.
Worthington Industries (WOR) is a leading industrial manufacturing company delivering innovative solutions to customers that span many industries including transportation, construction, industrial, agriculture, retail and energy.
The board of directors of Worthington Industries, declared a quarterly dividend of $0.25 per share, an increase of 4%. Worthington has increased its dividend for 10 consecutive years and has paid a quarterly dividend since it became a public company in 1968.
Over the past decade, this newly minted dividend achiever has managed to grow distributions at an annualized rate of 6.70%.
The company managed to grow earnings from 57 cents/share in 2010 to $1.41/share in 2020. The company is expected to earn $2.06/share in 2020 and 2021.
The stock sells at 16.60 times forward earnings and offers a dividend yield of 2.90%.
Relevant Articles:
- My screening criteria for dividend growth stocks
- How to read my stock analysis reports
- Dividend Investing Resources I Use
- How to determine if your dividends are safe
Reviewing the list of dividend increases also helps me to identify companies for further research. While I do my fair share of screening on the list of dividend champions, dividend aristocrats, achievers and contenders, I also prefer to look at individual stories. I invest using a bottom up approach, but also try to look at the big picture as well.
Over the past week, there were three companies that raised dividends:
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.
The Kroger Co.'s Board of Directors approved a dividend increase from 16 to 18 cents per quarter. Kroger's quarterly dividend has grown at a double-digit compound annual growth rate since it was reinstated in 2006. This marks the 14th consecutive year of annual dividend increases for this dividend achiever.
"Kroger's 12.50 percent dividend increase reflects our ability to deliver strong free cash flow during uncertain times and throughout the economic cycle," said Rodney McMullen, Kroger's chairman and CEO. "It also reflects the Board of Directors' confidence in both our business model and our commitment to return value to shareholders and achieve consistently attractive total shareholder returns."
Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 12.60%.
Kroger managed to grow earnings from 94 cents/share in 2009 to $2.04/share 2020. The company is expected to earn $2.71/share in 2021 and $2.56/share in 2022.
Kroger sells for 12.10 times forward earnings and yields 2.20%. Check my analysis of Kroger for more information about the company.
Hingham Institution for Savings (HIFS) is a Massachusetts-chartered savings bank located in Hingham, Massachusetts.
The bank announced that its Board of Directors has declared a regular quarterly cash dividend of $0.43 per share. This represents an increase of 2% over the previous regular quarterly dividend of $0.42 per share as well as a 10.20% increase over the dividend paid during the same time last year.
The company has consistently increased regular quarterly cash dividends over the last twenty-five years. The Bank has also declared special cash dividends in each of the last twenty-five years, typically in the fourth quarter.
Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 6.10%.
The bank has managed to grow earnings from $3.79/share in 2009 to $17.83/share in 2019. There are no earnings estimated for 2020 due to its small size, but trailing 12 month earnings are at 14.33/share.
The stock is selling for 11.10 times earnings and has a dividend yield of 1.10%.
Worthington Industries (WOR) is a leading industrial manufacturing company delivering innovative solutions to customers that span many industries including transportation, construction, industrial, agriculture, retail and energy.
The board of directors of Worthington Industries, declared a quarterly dividend of $0.25 per share, an increase of 4%. Worthington has increased its dividend for 10 consecutive years and has paid a quarterly dividend since it became a public company in 1968.
Over the past decade, this newly minted dividend achiever has managed to grow distributions at an annualized rate of 6.70%.
The company managed to grow earnings from 57 cents/share in 2010 to $1.41/share in 2020. The company is expected to earn $2.06/share in 2020 and 2021.
The stock sells at 16.60 times forward earnings and offers a dividend yield of 2.90%.
Relevant Articles:
- My screening criteria for dividend growth stocks
- How to read my stock analysis reports
- Dividend Investing Resources I Use
- How to determine if your dividends are safe
Friday, June 26, 2020
Expect Dividend Cuts and Dividend Freezes in the Banking Sector
Update 06/29/2020: Wells Fargo (WFC) announced that it may have to cut dividends after releasing results on July 14, 2020. Source: WFC Announcement
The Federal Reserve released its information on bank stress tests yesterday - June 25, 2020. You can read the announcement at this link. I found the following information very interesting, as it pertains to investors:
"For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.
All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.
During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks. The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings. As a result, a bank cannot increase its dividend and can pay dividends if it has earned sufficient income."
I bolded the words to show you the support behind my analysis.
It basically boils down to the fact that banks will experience credit losses due to high unemployment, and the recession related to Covid-19. The bank system is sound, and can survive a recession, as well as a potential W or V shaped recovery. There may be fewer casualties, in comparison to the Great Recession from 2007 - 2009. Therefore, the Federal reserve expects fewer bank failures from the larger companies.
However, in order to maintain liquidity and capital reserves, banks cannot do share buybacks for the third quarter. It is likely that banks won't be able to do share buybacks until the recession is over. That may mean that they won't be able to take advantage of "low prices", due to government regulation.
Banks can still continue paying dividends, but they will be unable to raise dividends for the duration of this recession. It would be nice if we just get away with dividend freezes - meaning dividends are unchanged. Financial dividends will return after the recession is over, and the stress tests allow them to do so.
The trouble is if banks report losses due to loans deteriorating due to the recession. If they are temporarily unable to earn enough to pay the dividend, they have to cut dividends. In other words, if Wells Fargo loses money in Q3 2020, it would have to cut dividends or suspend them, even if the bank recovers in Q4 2020. I doubt that a recovery would be so quick, as it looks today that we are headed for a second wave of Covid-19 cases, and potentially a second shutdown.
It also looks like the Federal Reserve is viewing share buybacks differently from dividends. It makes sense, because companies usually allocate any residual excess cash flows to buybacks that are not committed to dividends or growing the business. Buybacks can be best viewed as special dividends, so they are not recurring, and dependable like dividends.
I have a small allocation to banks. I will be selling if we have dividend cuts however. If a company maintains dividends, I will hold on to it. Perhaps I would finally learn the lesson that banks are cyclical companies, which cannot pay dependable dividends through the ups and downs of the economic cycle.
Selling financial companies after a dividend cut worked well early in the last recession, mostly in 2007 and 2008. Selling after a dividend cut was a mistake in 2009. Either way, it is important to stick to a plan, through thick or thin!
Relevant Articles:
- TARP is bad for dividend investors
- Which Bank will be next? Follow the dividend cuts
- Dividend Investing During the Financial Crisis
- Six things I learned from the financial crisis
The Federal Reserve released its information on bank stress tests yesterday - June 25, 2020. You can read the announcement at this link. I found the following information very interesting, as it pertains to investors:
"For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.
All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.
During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks. The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings. As a result, a bank cannot increase its dividend and can pay dividends if it has earned sufficient income."
I bolded the words to show you the support behind my analysis.
It basically boils down to the fact that banks will experience credit losses due to high unemployment, and the recession related to Covid-19. The bank system is sound, and can survive a recession, as well as a potential W or V shaped recovery. There may be fewer casualties, in comparison to the Great Recession from 2007 - 2009. Therefore, the Federal reserve expects fewer bank failures from the larger companies.
However, in order to maintain liquidity and capital reserves, banks cannot do share buybacks for the third quarter. It is likely that banks won't be able to do share buybacks until the recession is over. That may mean that they won't be able to take advantage of "low prices", due to government regulation.
Banks can still continue paying dividends, but they will be unable to raise dividends for the duration of this recession. It would be nice if we just get away with dividend freezes - meaning dividends are unchanged. Financial dividends will return after the recession is over, and the stress tests allow them to do so.
The trouble is if banks report losses due to loans deteriorating due to the recession. If they are temporarily unable to earn enough to pay the dividend, they have to cut dividends. In other words, if Wells Fargo loses money in Q3 2020, it would have to cut dividends or suspend them, even if the bank recovers in Q4 2020. I doubt that a recovery would be so quick, as it looks today that we are headed for a second wave of Covid-19 cases, and potentially a second shutdown.
It also looks like the Federal Reserve is viewing share buybacks differently from dividends. It makes sense, because companies usually allocate any residual excess cash flows to buybacks that are not committed to dividends or growing the business. Buybacks can be best viewed as special dividends, so they are not recurring, and dependable like dividends.
I have a small allocation to banks. I will be selling if we have dividend cuts however. If a company maintains dividends, I will hold on to it. Perhaps I would finally learn the lesson that banks are cyclical companies, which cannot pay dependable dividends through the ups and downs of the economic cycle.
Selling financial companies after a dividend cut worked well early in the last recession, mostly in 2007 and 2008. Selling after a dividend cut was a mistake in 2009. Either way, it is important to stick to a plan, through thick or thin!
Relevant Articles:
- TARP is bad for dividend investors
- Which Bank will be next? Follow the dividend cuts
- Dividend Investing During the Financial Crisis
- Six things I learned from the financial crisis
Monday, June 22, 2020
Visa (V) Dividend Stock Analysis
Visa Inc. (V) operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities.
Visa is a dividend achiever, which has managed to increase its quarterly dividends for 11 consecutive years.
Between 2009 and 2019, the annual dividend increased from 10 cents/share to $1/share. The last dividend increase occurred in October 2019, when the Board of Directors hiked quarterly dividends by 20% to 30 cents/share.
The company is in the initial phase of dividend growth, where dividends increase faster than earnings due to low initial payout ratio. Future growth in dividends will likely exceed the rate of increase in earnings per share over the next decade, after which dividend growth would likely closely follow growth in earnings per share.
The growth in dividends was fueled by rapid growth in earnings per share over the past decade. Visa managed to grow earnings from 78 cents/share in 2009 to $5.32/share in 2019.
The company is expected to earn $5.03/share in 2020 and $5.87/share in 2021. The Covid-19 recession decreased earnings expectations. A little over the past 90 days the expectations were for $6.10/share in earnings for 2020 and $7.16/share in 2021.
With Visa I liked the fact that the company is part of a global duopoly with Mastercard (MA) in the global credit card market. In the future, the proportion of cashless payments is going to increase. While the market for credit cards is developed in the US, in emerging markets there is the opportunity for hundreds of million people who will sign up for the first card in their lives over the next decade.
Visa has a wide moat due to its strong brand, scale of operations, and legal barriers to entry, as well as the Network Effect. When more retailers accept a given card, other merchants will be more willing to accept Visa as a payment method, in order to compete successfully for customers. When more retailers accept Visa, more customers are willing to use Visa as a payment method due to its convenience factor. When more customers are willing to use Visa, more retailers are willing to accept Visa as a payment method, in order to gain those customers. As a result, any additional new customer or a new retailer that is added to the network increases its depth and appeal, thus making it more valuable and needed. With the Network Effect, a service is more valuable when more participants use it.
When you have a payment network, you also achieve scale, as you have a large number of participants (both retailers and customers). Therefore, it is extremely difficult to set up a competing network for payments. In addition, there are high barriers to entry due to complicated legal and regulatory frameworks in different countries. Once you achieve a certain scale, the type that Visa and MasterCard possess, each additional transaction in the network is much more profitable.
The market for cashless transactions is destined to only increase in the future. Most transactions in the developing world are still done with cash currency, which causes a cost to merchants. Accepting, storing, and transporting cash is expensive because of the risk of theft, counterfeit currencies, and making errors in calculations. I expect the volume of cashless transactions using debit and credit cards to only increase in the coming two decades. I like the strong brand of Visa, which is essentially a duopoly with MasterCard, although American Express has somewhat of an entrenched position with business customers. In addition, as more shopping is done online, the need for debit and credit cards increases as well. Retailers like plastic, because consumers end up spending more when they pay on credit and do not have to dole out physical cash right away.
In addition, I expect the amount of transactions to increase over time as well. Therefore, the company will benefit from growth of overall transaction volume and the increase in share of cashless transactions globally.
The risk to companies like Visa is a paradigm shift in technology, which could help consumers to use an alternative payment method for cashless transactions. However, those paradigm shifts will be difficult for competitors because of the regulatory barriers and the fact that the competing network would still need to get more customers to use it and more retailers to accept it. Building out a competing network from scratch could be costly and time-consuming. It would be much easier for such a paradigm-shifting technology to partner with the likes of Visa, rather than compete directly head-on with it.
The company has returned money to shareholders through dividends and share buybacks since its IPO. Between 2009 and 2019, the number of shares outstanding has decreased from 3.036 billion to 2.272 billion. The consistent decrease in shares outstanding adds an extra growth kick to earnings per share over time.
The dividend payout ratio has increased from 13% in 2009 to 19% in 2019. There is room to increase dividends at a rate higher than earnings by expanding the payout ratio. 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 stock is overvalued at 38 times forward earnings and yields only 0.60%. This is a company that will offer a high potential for future dividend growth, and a high yield on cost in the future. I would be surprised if Visa does not pay at least $5/share in annual dividends in 2030. Chances are its earnings would be triple what they are today by 2030. Of course, this is a company worth $400 billion too, so the mere size will be an impediment to future growth rates.
Relevant Articles:
- The importance of yield on cost
- Twelve Dividend Growth Stocks In The News
- My Dividend Growth Stock Wish List
- Should Dividend Investors Ever Break Their Rules?
- Four Dividend Growth Stocks to Consider on Dips
Visa is a dividend achiever, which has managed to increase its quarterly dividends for 11 consecutive years.
Between 2009 and 2019, the annual dividend increased from 10 cents/share to $1/share. The last dividend increase occurred in October 2019, when the Board of Directors hiked quarterly dividends by 20% to 30 cents/share.
The company is in the initial phase of dividend growth, where dividends increase faster than earnings due to low initial payout ratio. Future growth in dividends will likely exceed the rate of increase in earnings per share over the next decade, after which dividend growth would likely closely follow growth in earnings per share.
The growth in dividends was fueled by rapid growth in earnings per share over the past decade. Visa managed to grow earnings from 78 cents/share in 2009 to $5.32/share in 2019.
The company is expected to earn $5.03/share in 2020 and $5.87/share in 2021. The Covid-19 recession decreased earnings expectations. A little over the past 90 days the expectations were for $6.10/share in earnings for 2020 and $7.16/share in 2021.
With Visa I liked the fact that the company is part of a global duopoly with Mastercard (MA) in the global credit card market. In the future, the proportion of cashless payments is going to increase. While the market for credit cards is developed in the US, in emerging markets there is the opportunity for hundreds of million people who will sign up for the first card in their lives over the next decade.
Visa has a wide moat due to its strong brand, scale of operations, and legal barriers to entry, as well as the Network Effect. When more retailers accept a given card, other merchants will be more willing to accept Visa as a payment method, in order to compete successfully for customers. When more retailers accept Visa, more customers are willing to use Visa as a payment method due to its convenience factor. When more customers are willing to use Visa, more retailers are willing to accept Visa as a payment method, in order to gain those customers. As a result, any additional new customer or a new retailer that is added to the network increases its depth and appeal, thus making it more valuable and needed. With the Network Effect, a service is more valuable when more participants use it.
When you have a payment network, you also achieve scale, as you have a large number of participants (both retailers and customers). Therefore, it is extremely difficult to set up a competing network for payments. In addition, there are high barriers to entry due to complicated legal and regulatory frameworks in different countries. Once you achieve a certain scale, the type that Visa and MasterCard possess, each additional transaction in the network is much more profitable.
The market for cashless transactions is destined to only increase in the future. Most transactions in the developing world are still done with cash currency, which causes a cost to merchants. Accepting, storing, and transporting cash is expensive because of the risk of theft, counterfeit currencies, and making errors in calculations. I expect the volume of cashless transactions using debit and credit cards to only increase in the coming two decades. I like the strong brand of Visa, which is essentially a duopoly with MasterCard, although American Express has somewhat of an entrenched position with business customers. In addition, as more shopping is done online, the need for debit and credit cards increases as well. Retailers like plastic, because consumers end up spending more when they pay on credit and do not have to dole out physical cash right away.
In addition, I expect the amount of transactions to increase over time as well. Therefore, the company will benefit from growth of overall transaction volume and the increase in share of cashless transactions globally.
The risk to companies like Visa is a paradigm shift in technology, which could help consumers to use an alternative payment method for cashless transactions. However, those paradigm shifts will be difficult for competitors because of the regulatory barriers and the fact that the competing network would still need to get more customers to use it and more retailers to accept it. Building out a competing network from scratch could be costly and time-consuming. It would be much easier for such a paradigm-shifting technology to partner with the likes of Visa, rather than compete directly head-on with it.
The company has returned money to shareholders through dividends and share buybacks since its IPO. Between 2009 and 2019, the number of shares outstanding has decreased from 3.036 billion to 2.272 billion. The consistent decrease in shares outstanding adds an extra growth kick to earnings per share over time.
The dividend payout ratio has increased from 13% in 2009 to 19% in 2019. There is room to increase dividends at a rate higher than earnings by expanding the payout ratio. 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 stock is overvalued at 38 times forward earnings and yields only 0.60%. This is a company that will offer a high potential for future dividend growth, and a high yield on cost in the future. I would be surprised if Visa does not pay at least $5/share in annual dividends in 2030. Chances are its earnings would be triple what they are today by 2030. Of course, this is a company worth $400 billion too, so the mere size will be an impediment to future growth rates.
2019
|
2018
|
2017
|
2016
|
2015
|
2014
|
2013
|
2012
|
2011
|
2010
|
|
P/E High
|
35.16
|
34.08
|
38.15
|
33.79
|
29.81
|
27.26
|
26.43
|
42.70
|
17.42
|
22.71
|
P/E Low
|
22.86
|
23.73
|
26.85
|
26.66
|
18.91
|
20.85
|
17.75
|
25.54
|
12.23
|
15.17
|
- The importance of yield on cost
- Twelve Dividend Growth Stocks In The News
- My Dividend Growth Stock Wish List
- Should Dividend Investors Ever Break Their Rules?
- Four Dividend Growth Stocks to Consider on Dips
Thursday, June 18, 2020
How long will it take to generate $1,000 in monthly dividend income?
Hitting $1,000 in Monthly Dividend Income
This is a question which I frequently receive from readers, who signed up for my premium newsletter.
As you know, I try to invest $1,000 every month, in ten attractively valued companies. I try to invest in what I find to be some of the best values that I can find at the time. As a result, one of my frequent answer is that the time it would take to generate $1,000 in monthly dividend income will depend on the circumstances during the next decade or so.
When pressed for a timeline, I usually answer that it would take anywhere between ten to fifteen years. As you can see, I am offering a range of potential outcomes, because life is uncertain and because I see a likely range of how things will unfold in the future. The range of outcomes is in dividend yields available when I have money to invest, as well as the estimated dividend growth I will experience during the investing journey. The only constant will be the amount of money I plan to invest each month, which will be around $1,000/month.
As a general rule, if stocks are overvalued during the next decade, it could take longer to reach my objectives. If stocks are undervalued, it should take much less time to reach out my goals.
I then looked at a few different scenarios, the likelihood of which is pretty difficult to estimate. But I did make those projections anyways.
I used the following spreadsheet to input my estimates. You may give it a try.
It lists a few different inputs on cells C1, C2 and C3, notably dividend growth, dividend yield and amount I plan to invest.
The calculations in rows 6 through 305 show the projections, using inputs above.
The first column shows the month.
The second column shows the number of shares accumulated through new investment and dividend reinvestment.
The third column is showing the share price for the average company that the model is investing in.
Initially, the share price is at $1, but then it tends to increase by the rate of annual dividend growth. This is why when you invest $1,000 initially, you can buy 1000 shares. In 12 months, after the dividend increases by 6%, the share price increases by 6% as well. As a result, the same $1,000 only buys 943 new shares. The fourth column simply shows the monthly dividend amount per share, which tends to increase by the rate expected in cell C1. The last column is simply the monthly dividend income generate by the portfolio. This is the column where I look for the amount that is at or above $1,000, in order to see how many months it would take me to reach the stated portfolio goals and objectives.
I am going to run through a few of the scenarios listed below:
The first scenario uses a dividend yield of 3% and an annual dividend growth of 6%/year. If I can find securities yielding 3%, which also grow dividends by 6%/year, I would be able to reach $1,000 in monthly dividend income within 188 months, which is about 15 and a half years. Based on how I have been investing over the past 10 months, this sounds like a decent possibility for an outcome. This example assumes that I can invest my portfolio in a basket of securities every single month with an average dividend yield of 3% and an average annual dividend growth of 6%/year. This and all the other assumptions listed below also take into consideration dividend reinvestment – essentially dividends are reinvested into a basket of stocks yielding 3%, with a 6% rate of organic dividend growth.
Per the model, someone who invested for 23 months should have an estimated monthly dividend income of $60.98, which translates to an annual dividend income of $731.76. Coincidentally, after investing for 23 months in the Dividend Growth Portfolio Newsletter, I have invested $24,410 and have an estimated dividend income of $791.40/year. This translates to a monthly dividend income of $65.95.
Increasing the dividend growth rate to 7% only shaves off a few months, as it will only take 180 months to reach the goals and objectives of my real money experiment. Now, if my dividend growth portfolio that yields 3% ends up growing distributions at an annual rate of 10%/year, I would reach my goals within 157 months. Given the state of the available opportunities today, I am not sure that I can find companies growing dividends above 6%/year, which will also yield 3% or more.
If share prices become overvalued from here, to the point where the average portfolio yield is 2%, but the dividend growth is 7%/year, it would take me 229 months (19 years) to reach my goal of earnings $1,000 in monthly dividend income from my portfolio. This is a scenario with a low likelihood in my opinion.
If on the other hand we get better entry yields, and we see dividend yield of 4% and dividend growth of 6%/year, I will reach my goals within 154 months. This is close to 13 years. This is a likely scenario, which will likely present itself during the next bear market. It is possible that dividend investing falls out of favor with the investment community, which may translate into lower prices and better starting yields. Around the time of the financial crisis, and even up to 2012, it was possible to build a portfolio of attractively valued securities yielding around 4%. This was the when utilities such as Con Edison (ED) yielded close to 6%.
If we get the recession that everyone has been warning about over the past decade, we would likely get depressed stock prices for a long period of time. Under such a scenario, it may be possible to build a portfolio yielding 5% or even 6%, while everyone else is selling securities and building underground bunkers. For this to happen of course, we would likely be seeing some type of an economic contraction, high inflation and high interest rates. For example, in 1980, Coca-Cola (KO) was yielding close to 6% at one time. Colgate-Palmolive (CL) yielded 8%, Clorox (CLX) had a dividend yield of close to 9%, while Procter & Gamble (PG) yielded 5%.
If I use the estimate for a 5% dividend yield, coupled with 6% in dividend growth, I can see myself reaching the goals and objectives within 130 months. At a 6% dividend yield, I will reach the goals and objectives within 110 months. That doesn’t mean that I will be chasing yield however.
I want to caution you against chasing yield to reach the goals. I want to build a sustainable dividend portfolio, where safety of the dividend income is of primary importance. I want a dividend income stream that grows at least at the rate of inflation over time, in order to maintain purchasing power of my dollars. I also want to have a margin of safety in dividend payments, in order to minimize the risk and impact of dividend cuts on the income stream. Most companies with higher yields today have higher dividend payout ratios. If the underlying business suffers short-term turbulence in earnings due to a recession for example, or increased competition, there is a high risk of a dividend cut. A 6% dividend yield is of no help to the retired investor, if the dividend is slashed in half during the next recession. Managing risks to the portfolio is of utmost importance to the retired dividend investor.
The other thing I want to state is that future projections are fairly linear in nature. In my projections I use a flat expectations in terms of yield and growth. It is possible that we may have one set of outcomes that span a few years, followed by another set of outcomes for a few years. For example, we may have valuations where dividend yield is 3% for a few years, followed by a couple of years where valuations are very attractive and yields on blue chip securities reach 5% - 6%. Since I have the discipline to keep investing every month, I will be in a good position to take advantage of fire sales occurring along the way. The lower valuations along the way will help me reach my goals sooner.
If on the other hand stocks become overvalued and do not experience declines of any sustained kind, it will take a very long time to reach my goals and objectives. I will still try to turn over hundreds of rocks, in order to find the best values at the moment. However, results will suffer if quality companies are overvalued at available at a starting yield of 2% versus a starting yield of 4%.
I am also trying to maintain a diversified dividend portfolio, and not swing for the fences by taking concentrated bets which can work greatly or fail miserably. I am a conservative investor who is building this portfolio as if it will be the only stream of income providing for me in old age, when I cannot work or generate any other form of income. As such I emphasize on the security of the dividend stream, valuation, and company’s ability to maintain and grow that dividend stream through growth in the business. However, I do not want to rely too much on a single security for my fortune. I want a group of companies, working as a team, to shower me with more cash every year.
I look beyond sector and company allocations in terms of diversifiecation however. I also try to stack companies with the three different types of dividend growth and dividend yield characteristics. The first group is comprised of companies with lower current yields, which is compensated by higher expected dividend growth. The second group is comprised of companies in the sweet spot, where dividend yields are adequate, while dividend growth is above the mid single digits. The last group includes companies which offer higher yields today, but the dividend growth is expected to be slower.
The nature of the stock market is that the attractively valued securities and sectors do not come at a predictable timeline. Sometimes, whole sectors are overvalued for extended periods of time, which is why I may not build out significant positions there for extended periods of time. Then all of a sudden, investor sentiment may shift, and these companies may be available at a better valuation. For example, REITs were richly valued in late 2019. Just a little over an year or two before that, the likes of Realty Income were selling at attractive valuations. Realty Income went to an attractive valuation in March - June 2020 again.
Alternatively, many sectors and securities are almost always available at attractive valuations. This is great when building out a dividend portfolio, but the risk is that I may end up being overly concentrated there. This is why it pays to keep monitoring the situation and take advantage of any declines in prices. However, it is also important to manage risks appropriately, in order to avoid concentrating too much in a given sector or company.
The most important lesson I learned from investing in dividend growth stocks over the years is to enjoy the journey!
Thank you for reading!
Relevant Articles:
- Types of dividend growth stocks
- The Dividend Crossover Point
- Three stages of dividend growth
- Risk Management
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