Four Dividend Paying Companies Raising Dividends. Which ones are worth a closer look?

I review the list of weekly dividend increases as part of my monitoring process. Over the past week, there were several companies that raised dividends to investors. I am going to discuss how I came up with the list of companies that raised dividends this week. I will then also discuss the quick review process I go through.

This is a useful exercise for many reasons, but also as an educational exercise on the process I use to quickly narrow down any list of prospective dividend growth stocks down to a more manageable level.

I focused my attention to companies that have managed to increase annual dividends for at least ten years in a row. We do this in order to focus out companies which have managed to boost distributions throughout at least one or two economic cycles. In addition to that, we focused on companies whose recent dividend increases over the past year was more than a token increase.

The next step I the process involved reviewing valuation. I usually weed out companies where P/E ratios were below 20. Due to the large number of one-time accounting hits to earnings, I use forward earnings as a shortcut way to go through a lot of companies quickly.

We also weed out companies where earnings per share or funds from operations didn’t grow over the past decade.

Should I invest in AT&T and Verizon for high dividend income?

Most readers are probably aware that it has been getting more difficult to find decent values in the current environment. When I ran my screens for valuation, I stumbled upon AT&T (T) and Verizon (VZ), which are telecom behemoths in the US.

AT&T (T) has increased dividends for 33 years in a row. In the past decade, it has managed to increase dividends by 3.70%/year. Between 1984 and 2016, the company has managed to increase dividends by 4.40%/year. The stock trades at 12.70 times forward earnings and yields 5.30%. The dividend is adequately covered with a dividend payout ratio of 67.60%, based on forward earnings. Check my previous analysis of AT&T for more information about the company.

Verizon (VZ) has increased dividends for 12 years in a row. In the past decade, dividends grew by 3.40%/year. Between 1984 and 2017, the company has managed to increase dividends by 3.30%/year. The stock trades at 11.60 times forward earnings and yields 5.30%. The dividend is adequately covered with a dividend payout ratio of 61.70%, based on forward earnings. Check my analysis of Verizon for more information about the company.

The telecom industry in the US is very competitive. Companies like AT&T (T) compete with the likes of Verizon (VZ), Sprint and T-Mobile. In the past, almost all of the profits have been made by Verizon (VZ) and AT&T, at the expense of smaller competitors. An investment in AT&T and Verizon today would presume that the status quo would remain unchallenged, and that Sprint and T-Mobile would be kept weak forever. The service that telecom companies is essentially a commodity. Telecom companies are not utilities, because there is the possibility for switching the provider. Try moving to Saint Louis, Missouri, and then switching your gas, water or electric utility – you can’t. But anywhere in the US, you can switch to another wireless carrier, plus you have other alternatives and very low customer loyalty. There is nothing to stop a customer from switching to another carrier after their contract expires.

Dividends Unlock Value For Shareholders

After observing companies for a decade now, I have come to the conclusion that dividends unlock value for shareholders. Let me start off with an actual example.

A few months ago, Costco (COST) announced that it would be paying a special dividend to shareholders.This event alone unlocked hidden value for shareholders.

On April 26, 2017 Costco announced special dividend of $7/share to shareholders on record from May 10, payable on May 26, 2017. The stock price rallied to 178.05/share at the opening and closed at $176.80/share on April 26, which was up from the close of $172.68/share on April 25. The stock closed at $172.64 on the ex-dividend date of May 8, and it had closed at 180.20 on May 5. In this case, the special dividend unlocked hidden value in the enterprise for shareholders.

That amount of money was locked in the business, and was not put to productive use for shareholders. This is why the company’s rational management decided to distribute the money to shareholders. This is the rational thing to do, when you are showered with cash, and you do not have a lot of high ROI projects to invest into. That $7/share were sitting in cash, but were not fully baked in the stock price, until the announcement unlocked this hidden value for shareholders.

I went back to look at the history of prior special dividends for Costco. I was stunned that every single special dividend ended up unlocking value for the shareholders. What I mean by “unlocking value” is the fact that the share price increased as a result of the special dividend announcement. So shareholders were better off as a result of the special dividend in every single case.

Two Dividend Growth Companies Rewarding Shareholders With a Raise

I like to check the pulse of dividend growth companies by monitoring dividend increases. This is helpful as part of my monitoring process. Two recent increases caught my eye. These are two companies I have owned for many years. These companies seem to have different expectations about the future. The first one is optimistic, and this has been fueled by rising earnings. The second company seems to be running out of space to raise dividends, due to stagnating profits. As dividend investors we are looking for the companies in the first camp. Of course, a long investing career will surely bring in some investments that show initial promise, but ultimately may turn out to be duds. Our goal is to manage our portfolios to reach our goals, despite having the occasional dud, and keep staying the course.

The companies that recently raised their dividend include:

Medtronic plc (MDT) manufactures and sells device-based medical therapies worldwide. The company raised its quarterly dividend by 7% to 46 cents/share. This marked the 40th consecutive year of an increase in the dividend payment for this dividend champion. Medtronic's dividend per share has nearly quadrupled over the past decade and has grown at a 17 percent compounded annual growth rate over the past 40 years.

Happy Financial Independence Day

Before I begin my message, I wanted to wish all my readers a Happy 4th of July. And I wanted to thank all of those military members for keeping us safe and able to enjoy our independence and freedom.

For the past seven and a half years, myself and my readers have been on a quest to achieve financial freedom with dividend growth stocks. So I wanted to take some time and reflect the accomplishments that we have all achieved in the past nine years.

Financial independence is the point at which the passive income exceeds expenses. People who achieve financial independence have the freedom to live their lives true to themselves. Most importantly, financially independent people have options in life. These options could include:

1) Working in a field they are passionate about
2) Caring for a child or a relative
3) Engaging in non-profit work, volunteering or charity
4) Writing a book
5) Traveling the world
6) Fill in the blanks (this is your passion so you have to decide what you want to do)