Seven Dividend Growth Stocks Rewarding Shareholders With Raises

 As part of my review process, I monitor the list of dividend increases every week. I use several different resources to come up with a list of dividend increases for the week. I then narrow the list down to include only these companies that have a minimum streak of annual dividend increases. In this case, I focus on companies that raised dividends for at least a decade.

There were seven dividend growth stocks that raised dividends last week. One of them, MSA Safety is a newly minted dividend king.

The companies that increased dividends over the past week include:

Company	Ticker	New Dividend	Old Dividend	Increase	Years Dividend Increases	P/E	Dividend Yield	10 year Annualized Dividend Growth
Algonquin Power & Utilities	AQN	$ 0.1808	$ 0.1706	5.98%	12	18.86	5.13%	9.59%
Union Pacific	UNP	$    1.30	$    1.18	10.17%	16	19.67	2.25%	16.09%
Alerus Financial	ALRS	$    0.18	$    0.16	12.50%	24	10.69	2.84%	7.77%
Phillips 66	PSX	$    0.97	$    0.92	5.43%	10	9.81	4.10%	8.12%
Cardinal Health	CAH	$ 0.4957	$ 0.4908	1.00%	26	10.67	3.57%	9.07%
First Merchants	FRME	$    0.32	$    0.29	10.34%	11	10.47	3.25%	39.67%
Microchip Technology	MCHP	$ 0.2760	$ 0.2530	9.09%	22	12.32	1.65%	2.09%

This is not an automatic list to buy of course. I would review each company, and determine if it makes sense from a fundamentals point of view. This would include reviewing trends in earnings, dividends, payout ratios, revenues, and gaining an understand of the company's business model.

The job is not done just by reviewing fundamentals however. The investor also needs to come up with a conclusion whether the stock is fairly valued at the moment. If it is not, then the investor may come up with a price at which the security may be attractive.

The other thing to consider is that valuation is relative. When evaluating companies, we compare them to other companies with promising fundamental and valuation characteristics. Then, we strive to pick the company or companies with the best values in the investors opportunity set.

While this sounds like a lot of work on the surface, with practice, it becomes almost a second nature.

Relevant Articles:

- Eight Dividend Growth Stocks Raising Distributions

- Sixteen Dividend Growth Stocks Raising Dividends Last Week

- Nine Dividend Growth Stocks Rewarding Shareholders With a Raise

- Five Companies Delivering Dependable Dividend Raises

The Dividend Crossover Point

The goal of every dividend investor is to one day accumulate a portfolio of income producing stocks, which would throw off a large amount of dividends every month. The magic point is where the dividend income exceeds the expenses of the dividend investor. At the dividend crossover point your dividend income meets or exceeds your expenses. For many dividend investors, this is the point synonymous with financial independence. After all, after years of sacrifice, wise investment and sticking to a plan, investors would finally be able to do be free from a nine to five job. The goal of reaching the dividend crossover point is achievable, but it takes capital, time, skill or luck in order to get to the magic point.

In order to reach that magical point, a lot of work needs to be done. Investors need to design a retirement strategy, and then stick to it through thick and thin, while also improving along the way. Some of the biggest dangers to successful dividend investing are not market volatility, dividend cuts or recessions, but investor psychology.

The process of accumulating a viable dividend stream will take anywhere from several years for those who are starting out with a large amount in their 401 (k) or IRA’s to a few decades for these young investors who are just starting out in their professional careers. Along the way, many investors will lose track of the goal due to sheer boredom or due to lack of patience. Successful dividend investing is sometimes as exciting as watching paint dry. Unfortunately, investors who enter dividend investing for the sheer excitement do not stick to it. On the other hand, investors who attempt to find shortcuts to speed up the process of capital accumulation by using options and futures, risky growth stocks or massive leverage will likely be disappointed along the way.

The key ingredients to accumulating a sufficient dividend income stream include time, dividend reinvestment and regular contributions to your portfolio. The power of regular contributions is important, because this ensures that investors consciously keep working towards their goal of dividend independence by investing in dividend stocks every month. While markets fluctuate greatly, I have always found at least 15 – 20 attractively valued income stocks at all times. Dividend reinvestment in dividend growth stocks is essential for turbo-charging your passive income. And last but not least, investors need the time to let their income compound to their desired amount.

Dividend investing takes time, before the amount of distributions reaches decent levels. Imagine that someone managed to save $1000/month for one year. Each month, they put $1000 total in two companies ($500 dollars per company per month). At the end of the first year, they would have about 24 companies, and the portfolio cost will be $12,000. If the average yield were 4%, this portfolio will generate $480 in annual dividends, which accounts for roughly $40/month. On the positive side, the dividends from this portfolio will generate enough to purchase one additional stock position per year. In addition, $40/month could pay for utilities, phone or internet bills for the investor pretty much for life. On the negative side, assuming that the investor needs $1000/month to cover their basic expenses, he or she would calculate that they would need to sacrifice almost for one decade, before their income reaches a decent amount. Once they are there however, and their portfolios consist of wide-moat dividend champions with sustainable distributions, investors will be able to live off dividends.

You can see that building that dividend machine can be a long term process. The levers within the control of the investor include their savings rate, ability to develop a strategy and stick to it, in order to allow the power of long-term investment compounding to do its magic.

In my investing, I have found very important to follow a few simple rules in order to create a sustainable dividend producing machine, which would produce dependable income for decades.

First, investors should focus on companies which have a long history of paying and raising dividends. I typically look for companies which have increased dividends for at least ten years in a row.

Second, investors should make sure that these companies are trading at attractive valuations. I have found that paying a P/E of over 20 could lead to poor results.

Third, investors should make sure that the company’s dividend is sustainable out of earnings or cash flows. I typically look for a dividend payout ratio of less than 60% for ordinary stocks. For REITs or Master Limited Partnership I look for FFO Payout and DCF Payout Ratios.

Fourth, investors should perform a qualitative analysis of the dividend paying company they consider for purchasing. This analysis should include understanding how the business makes money, growth prospects, competitive landscape, whether the business has any moat, whether the company has any strong brands, which consumers are loyal to and result in pricing power.

Fifth, investors should try to build a diversified dividend portfolio consisting of at least 50 -60 individual stocks coming from at least ten sectors. Having exposure to internationally based companies is a plus, despite the fact that most dividend growth stocks derive a major part of their profits from outside the US.

Conclusion

Today we discussed the concept of the dividend crossover point, which is the point where dividend income exceeds expenses. We also discussed the tools within the investor’s control to get there.

Finally, I shared a brief overview of the types of simple investing rules I follow to evaluate dividend paying stocks. All of the principles listed in this article are the cornerstones of the Dividend Growth Portfolio Newsletter that I launched a few years ago. I believe that by showing how I am building a real world portfolio from scratch, I can educate investors on the inner works of dividend investing.

At the same time, dividend income makes it easy to see how we are doing against our ultimate goal of $1,000 in monthly dividend income. Right now, the dividend growth portfolio is earning $110 in expected average monthly dividend income after three years of saving and investing. 

I expect that by following the principles outlined in this post, we should be able to hit the dividend crossover point of $1,000 in monthly dividend income within ten to fifteen years. The outcomes vary, because the conditions over the next decade or so will likely vary as well. If more securities are available at higher starting yields or if dividend growth is faster than anticipated we will achieve our goals quicker. If on the other hand starting yields are lower and dividend growth is lower, we will achieve our goals in a slower fashion

Relevant Articles:

- Use these tools within your control to get rich
- Getting Started – The Hardest Part About Dividend Investing
- What are your investment goals?
- Financial Independence Is Easier to Model with Dividends

Nine Dividend Growth Stocks Rewarding Shareholders With a Raise

I review the list of dividend increases every week, as part of my monitoring process. I usually focus my attention on the companies with a ten year streak of annual dividend increases, and then review each company using my criteria. I am always on the lookout for new ideas, and to determine if my existing holdings are working. I also want to be ready to act quickly, when the right time arrives.

This exercise helps me to evaluate companies I already own, and see how they are doing. This is a helpful piece of the puzzle, that would be helpful when/if I decide to add to these companies at the right price.

This exercise also helps me identify companies for further research. A large part of the time is spent reviewing companies, screening for companies, and trying to learn more about companies, their business, etc. 

It is not glamorous at all, but dull and boring. 

But it does pay dividends.

Over the past week, there were several companies raising dividends. The companies include:

This of course is just a list, not a recommendation. On a side note, PepsiCo actually first announced that they will be increasing that dividend in February with their financial results. However, they finalized the dividend data with the release from last week. 

When I review companies, I look at ten year trends in:

1) Earnings per share

2) Dividend payout ratio

3) Dividends per share

4) Valuation

Since I have some experience evaluating dividend companies, I also modify my criteria based on the environment we are in and the availability of quality companies. If I see a company with a strong business model and certain characteristics that I like, I may require a dividend streak that is lower than a decade. I have also found success in looking beyond screening criteria by purchasing stocks a little above the borders contained in a screen.

It is important to be flexible, without being too lenient.

You may like this analysis of PepsiCo (PEP) as an example of how I review companies.

Relevant Articles:

- 15 Companies Showering Shareholders With More Cash

- Five Companies Delivering Dependable Dividend Raises

- Eight Dividend Growth Stocks Raising Distributions

- Four Notable Dividend Increases Expected for April 2022

- Four Dividend Growth Stocks Rewarding Shareholders With Raises

Companies mentioned in this article: IEX, MAN, MSA, MTRN, PEP, POOL, RLI, UGI, WTS

Tom Russo and the Capacity to Suffer and the Capacity to Reinvest

I like to study successful investors, as part of my effort to continuously improve on my process. Tom Russo is one such investor. I believe I can learn from him.

Between 1990 and 2021, his fund, Semper Vic Partners delivered a total return of 12% to its investors. This was better than the 11.10% return of Dow Jones Industrials average and 10.50% return on S&P 500. Russo invests in a few select industries like industry food, tobacco, media and beverages in which companies have historically proven their ability to generate high and sustainable returns on capital.

His strategy seems to focus on the type of solid blue chip companies that deliver slow but steady performance. These businesses tend to generate a ton of free cashflows and tend to distribute a ton of cashflows to shareholders in the forms of dividends and buybacks, while still growing over time. In addition, these businesses have a product or service that is relatively recession resistant. Such businesses tend to think about the long-term, but sadly are rarely available at discounted valuations. Russo says investors should look to buy businesses with some margin of safety that comes when these businesses are available at a sufficient discount from their actual value.

The businesses he focuses on are companies with leading brands, such as Nestle or Brown Forman, which operate globally. They have powerful brands that are globally known, which give them the ability to enter new markets and grow market shares in different countries. A strong brand commands price elasticity and drives recurring revenue and high return on capital, and reduces the risk of the business model. Price elastic demand is crucial because loyal consumers will be willing pay a higher price should inflation drive up ingredient cost and the company needs to maintain its margin through higher prices.

This has been the case in emerging markets over the past 30 years. Riding the wave of increased prosperity and emerging growth has been beneficial for global brands. When they enter, the market may not be  developed, which means that these brands should have the capacity to suffer throughout the initial phase of market development and the development of the country they just launched operations in. However, as the country grows its economy, its consumers grow their disposable income, the market demand increases, which is good for business. These businesses also have the capacity to reinvest a portion of their income, at a high hurdle rate of return, in order to build the base for future dividend growth. He basically looks for companies with two characteristics – the capacity to suffer and the capacity to reinvest.

He was able to invest in companies like Nestle as early as the late 1980s and early 1990s, when it was much harder for US investors to access this security. He does use Nestle as an example of a company that can enter a new market and invest there to build up its operations with a long term focus. It can "suffer" low profits initially, but with the expectation to make more profit down the road. This of course is possible because of the diversified nature of its global operations, which can temporarily subsidize future ventures. Nestle shareholders of course have enjoyed a streak of rising dividends since 1995.

Tom Russo also looks at family controlled businesses, because he has found that these types of companies tend to think long-term, and avoid the short-term pressures of Wall Street. These are businesses that do not care about beating a quarterly estimate by Wall Street. Instead, they think about years, if not decades, down the road. This is particularly powerful when you are dealing with some of the staples, which have more predictable demand for their goods. These companies are willing to reinvest for the future, even if it means some short-term pain. 

The nature of the companies he invests in shows me that he invests in consumer products companies like food, beverage, tobacco and media. A lot of these businesses have been around for a long time, have strong brands, some pricing power and a relatively inelastic demand. They are market leaders in their niche, and would likely be around decades from now. An investor who buys at the right price would likely generate a steady stream of growing dividends, fueled by a steady compounding in earnings per share over decades. These are the types of companies with a long future runway that patient buy and hold investors like to invest in.

If you look at the companies in his portfolio, you can see that these companies have strong global brands, they have benefitted from international expansion, and the rise in international consumerism. These companies include Nestle, Mastercard, Unilever, Philip Morris, Brown-Forman, Google.

You can read more about Tom Russo here.

There is a talk he did on Global Value Investing.

He also explained his strategy with Consuelo Mack a few years ago here.

I enjoyed this article from Morningstar: Tom Russo: Good investors must have the "capacity to suffer"

Check this article at MOI Global: Nestlé: A “Bond” and a “Venture Capital Fund”

I like this transcript from the 8th Value Investor Conference. Check this transcript out from the 3rd Value Investor Conference as well

Sixteen Dividend Growth Stocks Raising Dividends Last Week

I review the list of dividend increases every week, as part of my monitoring process. I usually focus my attention on the companies with a ten year streak of annual dividend increases, and then review each company using my criteria. I am always on the lookout for new ideas, and to determine if my existing holdings are working. I also want to be ready to act quickly, when the right time arrives.

This exercise helps me to evaluate companies I already own, and see how they are doing. This is a helpful piece of the puzzle, that would be helpful when/if I decide to add to these companies at the right price.

This exercise also helps me identify companies for further research. A large part of the time is spent reviewing companies, screening for companies, and trying to learn more about companies, their business, etc. 

It is not glamorous at all, but dull and boring. 

But it does pay dividends.

Over the past week, there were several companies raising dividends. The companies include:

This of course is just a list, not a recommendation.

I also wanted to mention that Raytheon Technologies (RTX) also raised dividends by 7.80% to $0.55/share. This is the core of the old United Technologies, which merged with Raytheon in 2020, and then split into three companies - Raytheon Technologies, OTIS and Carrier. 

Because of the way Otis and Carrier proceeded about their dividend policies, immediately after the spin-off, shareholders ended up with less annual income than before the split. Therefore, shareholders effectively received a dividend cut. But I still view Raytheon as a company that didn't cut dividends. It was a rare combination where I didn't sell after a cut, and was rewarded for it. Perhaps because of the confusion, I held on. But the dividend aristocrats, dividend achievers indices have taken the company and spun-off parts off their portfolios.

When I review companies, I look at ten year trends in:

1) Earnings per share

2) Dividend payout ratio

3) Dividends per share

4) Valuation

Since I have some experience evaluating dividend companies, I also modify my criteria based on the environment we are in and the availability of quality companies. If I see a company with a strong business model and certain characteristics that I like, I may require a dividend streak that is lower than a decade. I have also found success in looking beyond screening criteria by purchasing stocks a little above the borders contained in a screen.

It is important to be flexible, without being too lenient.

You may like this analysis of Sysco (SYY) as an example of how I review companies.

Relevant Articles:

- Five Companies Delivering Dependable Dividend Raises

- Eight Dividend Growth Stocks Raising Distributions

- Four Notable Dividend Increases Expected for April 2022

- Four Dividend Growth Stocks Rewarding Shareholders With Raises

Companies included in this article: AAPL, AGCO, AMP, AVY, AWK, FDS, GWW, HWBK, IBM, K, LBAI, MET, PH, RRX, SYY, UNTY