Are Dividend Increases Beating Inflation in 2022?

The US stock market has been turbulent recently. As a Dividend Growth Investor, I usually ignore stock price fluctuations, unless I am looking to buy a quality stock at a discount. As a long-term investor, I focus on growing my dividend income. Dividends are more stable, predictable and reliable than stock prices. Dividends also tend to grow above the rate of inflation over time.

The stability and predictability of dividend payments make them an ideal source of income for retirees. While share prices can fluctuate, I can sleep well at night, knowing that my dividends are coming in, and most likely increasing as well.

In previous reviews, I have found that dividends in the US tend to grow above the rate of inflation over time. You may remember this chart from this post:

Source: How dividends protect income from inflation

With inflation rising, I decided to take a more granular look at US Equities, and see how they are faring. It looks that so far this year, dividend stocks are able to maintain purchasing power. Of course, the year is still young. If we get a recession, it is very likely that dividend growth could slow down. Alternatively, it can also accelerate as companies pass on cost increases to customers.

I went ahead and obtained a listing of all companies in the S&P 500, and then looked at their dividend actions so far in 2022. This review covers all companies that are members of S&P 500, and tracks all dividend actions between January 1 and June 9th.

There have been 193 dividend increases, 5 initial dividends and 5 dividend cuts so far in 2022. You can view a summary of dividend actions by sector in the table below:

Next, I drilled down on the list of dividend increases. I wanted to see how many dividend increases so far this year exceeded 8%. While inflation is 8.60%, I used 8% as the number, because the inflation number has been increasing in 2022. I didn't want to unjustly penalize companies that raised dividends earlier in the year. I would argue if we are arguing about 0.60% difference, we are nitpicking and splitting hairs. 

Anyway, out of the 193 dividend increases so far in 2022, it looks like 117 increases were higher than 8%. This is good to know.

A more interesting view is to look at the list of dividend aristocrats. There were 32 dividend increases so far in 2022. 

It looks like 13 companies raised dividends by more than 8%. The rest of the companies raised dividends by less than 8%. The average dividend increase is 7.46% however.

There are 31 dividend aristocrats, which have not raised dividends so far in 2022. I have listed them below, and also included the months in which these companies have raised dividends in 2021. If history is any guide, these companies usually tend to announce their dividend increases around the same time each year.

On a side note, this data comes straight from S&P Global. They do not seem to have included Realty Income (O) in their dividend increases lists. It did raise dividends slightly in March from $0.2465 to $0.247, but I think it would raise dividends a few more times in 2022.

All the data is from S&P Global.

You can also view my posts on dividend increases by clicking on this tag.

Relevant Articles:

- How dividends protect income from inflation

- If you didn't get an 8.60% pay increase, you received a pay cut

- A Look Under the Hood For Inflation

- Build your own inflation proof source of income in retirement with dividend stocks

If you didn't get an 8.60% pay increase, you received a pay cut

Over the past year, inflation has been on the increase. A popular meme on the internet is the saying that if you didn't receive an 8.60% increase in your income, you essentially received a pay cut. This is very relevant for those who are still earning salary, and even more relevant for those who are living off dividends.

In general, dividend income tends to grow above the rate of inflation over time. That does not mean that it grows above the rate of inflation in every single year however. There could be a lag, but over time dividends do provide protection against inflation. This is true for a diversified portfolio of stocks of course. Some companies grow dividends above the rate of inflation, while others closely match it; a third group grows dividends at a slower rate. 

This is where it is important to build a portfolio that includes the three groups of dividend growth stocks:

1) High dividend growth with a lower dividend yield

2) Companies that are in the sweet spot in terms of dividend yield and dividend growth

3) High yielding companies with a slower pace of dividend growth

The most important thing of course is to make sure that the economic engine of each company is constructed well, so that the company can keep growing revenues and earnings throughout the ups and downs of the economic cycle. A company that can successful pass cost increases to its customers is worth its weight in gold. Rising earnings per share can help in growing the dividend income, which in turn means that your dividend income can maintain purchasing power.

Over the past week, there were several companies that raised dividends to shareholders. I isolated the ones that have managed to grow dividends for at least a decade. You can observe how the highest yielding companies grew dividends at a very slow rate, albeit this is consistent with what they had done in the preceding 5 or 10 years. You can also observe that the companies that yield a little less are able to grow dividends at the rate of or faster than inflation.

While this is an isolated sample of just a weeks worth of dividend increases from the universe of dividend growth stocks, it is still good to illustrate the point I am making.

Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide.

Caterpillar increased its quarterly dividend by 8.10% to $1.20/share. Caterpillar has paid higher annual dividends to shareholders for 28 consecutive years and is a member of the S&P 500 Dividend Aristocrat Index. Over the past decade, the company has managed to boost dividends at an annualized rate of 9%.

The stock sells for 18 times forward earnings and offers a dividend yield of 2.15%.

Target Corporation (TGT) operates as a general merchandise retailer in the United States. 

The company increased its quarterly dividend by 20% to $1.08/share. This is the 51st consecutive year in which Target has increased its annual dividend. Over the past decade, this dividend king managed to grow annualized distributions by 11.10%/year.

This dividend king sells for 17.42 times forward earnings and yields 2.89%.

UnitedHealth Group Incorporated (UNH) operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx. 

The company increased quarterly dividends by 13.80% to $1.65/share. That's the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized rate of 24.80%.

The stock sells for 22.35 times forward earnings and yields 1.36%.

Casey's General Stores, Inc., (CASY) operates convenience stores under the Casey's and Casey's General Store names. 

The company increased its quarterly dividend by 8.60% to $0.38/share. This was the 23rd consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized rate of 9.20%.

The stock sells for 20.83 times forward earnings and yields 0.80%.

Universal Health Realty Income Trust (UHT) is a real estate investment trust that invests in healthcare and human service related facilities including acute care hospitals, rehabilitation hospitals, sub-acute care facilities, medical/office buildings, free-standing emergency departments and childcare centers. 

The REIT increased quarterly dividends by 0.70% to $0.71/share. The new dividend is 1.42% higher than the dividend paid during the same time last year. That's the 37th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to boost dividends at an annualized rate of 1.40%.

The REIT sells for 14.50 times FFO and yields 5.34%.

Oil-Dri Corporation of America (ODC) develops, manufactures, and markets sorbent products in the United States and internationally. It operates in two segments, Retail and Wholesale Products Group; and Business to Business Products Group.

The company increased its quarterly dividends by 3.70% to $0.28/share. This declaration marks the nineteenth consecutive year Oil-Dri has increased dividends. That was the 20th consecutive year of annual dividend increases for this dividend achiever.  Over the past decade, the company has managed to boost dividends at an annualized rate of 4.90%.

The stock yields 4.15%.

Citizens Financial Services, Inc. (CZFS) operates as the bank holding company for First Citizens Community Bank that provides various banking products and services for individual, business, governmental, and institutional customers. 

The company raised its quarterly dividend by 3.20% to $0.475/share. This was the 25th year of consecutive annual dividend increases for this newly minted dividend champion. Over the past decade, the company has managed to grow dividends at an annualized rate of 6.50%/year. The five year annualized rate of dividend growth is a more modest 2.30% however.

The stock yields 2.88% and sells for 9.76 times forward earnings.

Relevant Articles:

- How dividends protect income from inflation

- A Look Under the Hood For Inflation

- Types of dividend growth stocks

Air Products and Chemicals, Inc. (APD) Dividend Stock Analysis

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend aristocrat has paid distributions since 1954 and increased dividends on its common stock for 40 years in a row.

The company's last dividend increase was in February 2022 when the Board of Directors approved an 8.50% increase to 77 cents/share. The company's largest competitors include Linde (LIN) and Air Liquide (AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.50% to its shareholders.

The company has managed grow earnings from $4.66/share in 2012 to $9.12/share in 2021. Analysts expect Air Products and Chemicals to earn $10.29 per share in 2022 and $11.62 per share in 2023.

 

Air Products and Chemicals is expected to post growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia. Recent acquisitions and projects in Saudi Arabia could drive future earnings growth.

Air Products and Chemicals streamlines operations and tries to manage costs strategically. In the past, the company has been shedding unprofitable operations, and focusing on cost cutting initiatives, in order to boost the bottom line.

In order to grow, the company should focus on increasing volumes in the merchant segment, plus executing new projects on time and budged in the tonnage segment, while focusing on plan efficiency improvements. In addition, focusing on major customers in the electronics and performance materials segment, while also introducing new offerings that could increase margins and returns. Other important opportunities include focusing on the pricing and the right mix of productivity and cost reductions, in order to hit profitability and margin goals set for itself.

The company operates under long-term customer supply contracts, particularly in the gases on-site business. These contracts principally have initial contract terms of 15 to 20 years. There are also long-term customer supply contracts associated with the tonnage gases business within the Electronics and Performance Materials segment. These contracts principally have initial terms of 10 to 15 years. Additionally, they company has several customer supply contracts within the Equipment and Energy segment with contract terms that are primarily 5 to 10 years. Under those contracts, the Company has built a facility on land owned by the customer, and is essentially a de-facto monopoly in the specific geographic area for that customer.

The annual dividend payment has increased by 11.10% per year over the past decade.

 

The dividend payout ratio increased from 54% in 2012 to 75% in 2015, before gradually decreasing back to 64% in 2021. 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 number of shares outstanding has been growing at a snail pace. In general, you want to see shares outstanding flat or decreasing.

 

The stock is selling for 25.45 times forward earnings and yields 2.48%.

Relevant Articles:

- 35 Dividend Aristocrats For Further Research

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- Dividend Aristocrats List for 2022

- Where are the Original Dividend Champions today?

A. O. Smith Corporation (AOS) Dividend Stock Analysis

A. O. Smith Corporation (AOS) manufactures and markets residential and commercial gas and electric water heaters, boilers, and water treatment products in North America, China, Europe, and India. The company is a dividend aristocrat with a 28-year history of annual dividend increases. 

The last dividend increase occurred in early October 2021, when the board of directors approved a 7.70% hike in the quarterly dividend to 26 cents/share. 

Over the past decade, this dividend aristocrat has managed to grow distributions at an annual rate of 21.50%/year. I expect reasonably high dividend growth over time, which may even exceed earnings per share growth for the next decade.

Adjusted earnings per share have experienced a steep uphill climb over the past decade, rising from 54 cents/share in 2011 to $3.02/share in 2021. The company is expected to earn $3.55/share in 2022.

A.O. Smith is a manufacturer of residential and commercial water heaters, boilers and water treatment products. It operates in two segments - North America with about two-thirds of revenues and Rest of the world with about a third of revenues.

Growth in earnings per share can be generated from rising demand from new construction for boilers and water heaters, as well as from need for replacements. The need for replacements of water heaters and boilers. A rising market share in China, along with growth in the Chinese market can bolster sales.  International operations in general are expected to generate higher growth over time. The company can generate growth through new product introductions and through expanding of existing product lines. For example, the need for energy efficient units can drive sales down the road.

Strategic acquisitions can further boost revenues and earnings. Recent acquisitions allows A.O. Smith to enter the water treatment products market in North America. 

A slowdown in China can lead to declines in revenues. A decline in housing starts could also negatively affect companies like A.O. Smith. 

The company has reduced the number of shares outstanding by a little bit over the past decade, taking them from 186 million in 2011 to 161 million in 2021. 

The dividend payout ratio increased from 28% in 2011 to 35% in 2021. Based on the expected earnings, the forward dividend payout ratio comes out to 32%. The company’s dividend is very safe and will likely grow at a higher rate than earnings over the past decade due to low payout ratio.

Currently, the stock is attractively valued at 17.17 times forward earnings at yields 1.85%. 

Relevant Articles:

- Five Dividend Growth Stocks In the News

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Stanley Black & Decker: A Dividend King in Focus

Stanley Black & Decker, Inc. (SWK) engages in the tools and storage, industrial, and security businesses worldwide.

The company raised its quarterly dividend by 12.90% to 79 cents/share in July 2021. This marked the 54th consecutive annual dividend increase for this dividend king.

Stanley Black & Decker's CEO, James M. Loree, commented, "I am pleased to continue our trend of consecutive annual dividend increases, which reflects the continued confidence we have in the cash generation potential of the company.  A strong and growing dividend is a key element of our shareholder value proposition, and is consistent with our capital deployment philosophy to deliver approximately half of our excess capital to shareholders over the long term." (source)

Over the past decade, Stanley Black & Decker managed to grow dividends at an annualized rate of 6.20%.

Between 2011 and 2021, earnings per share grew from $3.97 to $9.62. The company is expected to generate $9.82/share in 2022.

The company has managed to grow through acquisitions, notably the merger between Stanley Works and Black & Decker in 2010. In 2017 it acquired the Craftsman brand from Sears. It actively manages its portfolio of products. Growing the businesses through M&A is central to the company’s strategy

The company is looking to increase efficiencies in the supply chain to reduce cost, and increase sales in emerging markets. About 59% of sales comes from the US, 4% in Canada, 24% Europe, 8% Asia. 

Stanley Black & Decker is also focused on growing its e-commerce sales, which account for $2 billion out of its $14 billion in sales.

The company is organized in three segments.

Tools & Storage accounts for 71% of sales and 80% of operating profits. The company is a leader in tools and storage. It has a portfolio of brands that tradespeople and DIY folks rely on. We are speaking about hand tools, power tools like DeWalt, Craftsman, Black & Decker etc.

Industrial accounts for 16% of revenues and 12% of operating profits. It builds solutions like preferred engineered fastening solutions in automotive and industrial channels to inflastructure solutions like hydraulic tools and attachments.

Security accounts for 13% of revenues and 8% of operating profits. The company delivers peace of mind with advanced electronic safety, security and monitoring solutions, automatic doors, and sophisticated patient safety, asset tracking and productivity solutions.

I believe that a picture is worth 1,000 words. Which is why I am including this slide from their annual report, which summarizes their value creation model.

Source: Company's Annual Report

The company managed to reduce the number of shares outstanding between 2011 and 2016 from 170 million to 148 million. Shares outstanding are up since then due to acquisitions.

The payout ratio has largely remained between 30% and 45%, with the exception of two spikes in 2013 and 2018. Those were triggered by one-time accounting items affecting earnings per share in each of those two years.

Currently, the stock is selling for 12.06 times forward earnings and yields 2.65%.

Relevant Articles:

- Dividend Aristocrats for Further Research

- Dividend Aristocrats List for 2021

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- Five Dividend Growth Stocks Rewarding Shareholders With Raises