Dividend Investors: Stay The Course

The past few months have been difficult for many investors. Stocks are down from their all time highs, reached just a few months ago. It is during times like these that you see who really is a long-term investor, and who is just a pretender. When you are a long-term buy and hold investor, you stand the best chances to take maximum advantage of the power of compounding, and end up with the probability for the highest dividend income and capital gains. These are the times where having a disciplined approach to investing pays off. These are the times when the ability to allocate capital to use in quality dividend stocks would seem stupid in the short-term, but potentially really brilliant 10 – 20 years down the road. When stock prices fall, there is an urge in the investor to protect their nest eggs from further price impairment.

This is a dangerous situation to be in because:

1) Noone knows in advance today when this correction is going to run out of steam or what its ultimate severity will be. So when you act on short-term noise, you are actually shooting yourself and those who will depend on you in the foot.

2) Therefore, if you act based on short-term price fluctuations, you are speculating and have essentially thrown out your edge of being a long-term investor. It is extremely difficult to win in investing as a short-term speculator – you will be in an out of stocks and paying taxes and commissions through the nose. Your main edge in the stock market lies in the ability to hold on to your stocks through thick and thin for decades, and cashing in those growing dividend checks ( or reinvesting them in the accumulation phase)

3) If you are in the accumulation phase, you should be praying for lower prices, because you are buying shares to provide for you in 20 – 30 years. A 200 point decline on the S&P 500 decline will likely look just like a blip on the charts 20 – 30 years from now. If you don’t believe me, check the 1987 crash. A lower entry price results in more future dividend income for you.

4) If you are in the retirement phase, you already have a plan to live off your assets. You are likely spending those dividends, and hopefully those dividends are coming from a diversified portfolio of dividend growth stocks. You are likely getting social security and possibly a pension. As long as there is some margin of safety in financial independence, and the dividend portfolio mostly consists of quality blue chips, the investor should be just cashing in their dividend checks and enjoy the fruits of their lifetime of labor.

I know that seeing unrealized capital losses hurts. However, the important thing is to just stick to your plan and stay the course. This is why I have chosen to be a dividend growth investor. When the stock market is going up, everyone is a total return investor and chases hot growth stocks and talks about how much capital gains they have made.

However, when the stock market starts going down in price, those capital gains could quickly turn into losses. Imagine having to sell chunks of your portfolio for living expenses when the stock market is going lower. You will eat your principal quickly, and increase your chances of panicking and doing the wrong thing of selling everything out. When your dividends cover your living expenses however, it is much easier to ignore those stock price fluctuations. As long as those dividends are coming from a diversified portfolio of quality blue chip stocks that are dependable, the investor has nothing to worry about. In fact, receiving cash dividends when the stock prices are going down is very reassuring, and provides the investor with positive reinforcement to just stay the course.

There is a reason why stocks have done much better than bonds in the long-run – they are riskier. With stocks, there is always the chance that there will be violent fluctuations in the price. You can have steep downturns, which can have many weak hands scrambling for the exits. When stock prices go down, many investors assume that something is wrong, they panic and sell. They forget that your upside potential in terms of dividends and capital gains is virtually unlimited. Some companies you own will ultimately cut dividends and sell at levels that were lower than what you paid for. Other companies in your portfolio will do well enough in the long term that will more than compensate for the failures you have experienced.

The issue with stocks of course is that the amount and timing of future capital gains is largely unknown in advance. This is why people panic when prices start going down – they project the recent past onto the future indefinitely. They forget that stocks are not just some pieces of paper or blips on a computer screen, but real businesses that sell real goods and services to consumers who are willing to exchange the fruits of their labor for those goods and services. Over time, those businesses as group will likely learn ways to sell more, charge more, earn more and reward their shareholders. No matter the turbulence we will experience in the US and Global stock markets and economies in the short-run, I believe that things will be better for all of us ten years from now. And as investors, we invest for the long term, not for the next 5 years or 5 months.

With bonds, you get limited upside mostly in terms of the interest payment you receive, and then hopefully a guaranteed return on investment after a set period of time. The issue of course is that fixed income will mostly keep up with inflation over time. Cash looks safe in the short-term, but it is expensive in the long run. Stocks look risky in the short run, but they are safer in the long run. While a portfolio of bank CD’s will not be quoted every day, providing an illusion that the money is safe, they are mostly keeping up with inflation rates in the long-run, before taxes.

Holding on to stocks pays in the long term better than holding bonds precisely due to their “riskier” nature. If you stay the course of regularly adding money to your accounts, you will be able to buy more shares of quality companies at a discount. After the dust settles, you will be ending up with more valuable pieces of real businesses than before. It intuitively makes sense that you will be better off buying a stock at $40/share as opposed to $75/share. If one share a stock is bought today, and dividends are reinvested, it could result in a net worth of $400 in 30 years. This exercise assumes a total return of 8%/year.. It also intuitively makes sense that if you reinvest your dividends when prices are low, you will end up with more shares and more dividend income over time.

Again, in order to benefit from all of this, you need to stay the course. This means saving money every month, putting money to work regularly, and not getting scared away. Perhaps if you are concerned about prices and you are in the accumulation phase, it may make sense to just start reinvesting dividends automatically. Or alternatively, it may make sense to automatically invest a portion of your paycheck through your 401 (k).


Relevant Articles:

- Successful Dividend Investing Requires Patience
- Fixed Income for dividend investors
- Dividend income is more stable than capital gains
- How to think like a long term dividend investor
- Long Term Dividend Growth Investing

The Importance of Dividends

I was reviewing my old files and re-visited an interesting paper from Standard & Poor's from a few years ago about the importance of dividends.

The paper states that dividends are important because:

1. They are a growing portion of personal income

2. More than one third of historical total returns came from dividends

3. Dividend paying stocks offer superior risk adjusted returns and potential for downside protection

I wanted to zoom in on this statement "Dividend paying stocks offer superior risk adjusted returns and potential for downside protection"

numerous academic studies have shown that dividend payers tend to outperform non-dividend payers across market cycles and offer higher risk-adjusted returns.

Dividends also play another important role during periods of volatility. While price returns can be either positive or negative, dividend incomes are by definition positive. Therefore, dividends provide investors with the opportunity to capture the upside potential while providing some level of downside protection in negative markets.

Fuller and Goldstein2 examined the return behavior of dividend paying and non-dividend paying firms in both up and down markets, from January 1970 to December 2007. The authors found that dividend paying firms outperformed non-dividend paying firms more in down markets than in up markets, with the results showing outperformance of 1% to 2% per month.

Dividends Act as a Cushion during Negative Equity Markets

Dividends also have lower volatility than Capital appreciation

The compounding effects of reinvesting dividends is undisputed.

You can read the full study here. 

Dividend investing is a widely discussed investment topic. The role of the paper was to add to the discussion by highlighting the role of dividends in generating returns. The beauty of dividend investing is that one can custom tailor their strategy to the outcome they are looking for. Some may focus on current income more so than dividend income growth, while others may want stable growth and income. The best way to embrace dividends is to identify your goals and objectives, your timeframce and risk preference, and design and implement a strategy to get you there.

Eight Dividend Growth Stocks Raising Distributions Last Week

I review the list of dividend increases every week as part of my monitoring process.

Dividend increases provide signaling value to me in my process of evaluating dividend growth companies. I believe it is an important tool in my toolset.

This exercise also helps me quickly review and scan large quantities of companies in order to narrow down the list to the most desirable candidates for further research.

I typically focus my attention on companeis that have managed to increase dividends for at least a decade.

Last week, there were 27 companies that increased dividends in the US. Eight of them have managed to increase dividends for at least a decade. The companies include:

CareTrust REIT, Inc.’s (CTRE) primary business consists of acquiring, financing, developing and owning real property to be leased to third-party tenants in the healthcare sector. 

The REIT raised its quarterly dividend by 15.52% to $0.34/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 24.85%.

The company managed to grow FFO from $0.94/share in 2015 to $1.50/share in 2024.

The company is expected to generate FFO/share of $1.78/share in 2025.

The stock sells for 16.10 times forward FFO and yields 4.68%.

Colgate-Palmolive Company (CL) manufactures and sells consumer products in the United States and internationally. It operates through two segments: Oral, Personal and Home Care; and Pet Nutrition.

The company raised its quarterly dividend by 4% to $0.52/share. This is the 62nd consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to increase dividends at an annualized rate of 3.38%.

The company managed to grow earnings from $1.53/share in 2015 to $3.53/share in 2024.

The company is expected to earn $3.71/share in 2025.

The stock sells for 24.35 times forward earnings and yields 2.30%.

Independent Bank Corp. (INDB) operates as the bank holding company for Rockland Trust Company that provides commercial banking products and services to individuals and small-to-medium sized businesses in the United States. 

The company raised its quarterly dividend by 3.51% to $0.59/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 9.17%.

The company managed to grow earnings from $2.51/share in 2015 to $4.52/share in 2024.

The company is expected to earn $5.43/share in 2025.

The stock sells for 11.62 times forward earnings and yields 2.32%.

JPMorgan Chase & Co. (JPM) operates as a financial services company worldwide. It operates through three segments: Consumer & Community Banking, Commercial & Investment Bank, and Asset & Wealth Management.

The company raised its quarterly dividend by 12% to $1.40/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 11.42%.

The company managed to grow earnings from $6.05/share in 2015 to $19.79/share in 2024.

The company is expected to earn $18.29/share in 2025.

The stock sells for 13.21 times forward earnings and yields 2.32%.

QUALCOMM Incorporated (QCOM) engages in the development and commercialization of foundational technologies for the wireless industry worldwide. It operates through three segments: Qualcomm CDMA Technologies, Qualcomm Technology Licensing, and Qualcomm Strategic Initiatives. 

The company raised its quarterly dividend by 4.71% to $0.89/share. This is the 23rd consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 7.60%.

The company managed to grow earnings from $3.26/share in 2015 to $9.09/share in 2024.

The company is expected to earn $11.73/share in 2025.

The stock sells for 13.36 times forward earnings and yields 2.27%.

Shoe Carnival, Inc. (SCVL) operates as a family footwear retailer in the United States. 

The company raised its quarterly dividend by 7.14% to $0.15/share. This is the 14th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 15.90%.

The company managed to grow earnings from $0.73/share in 2015 to $2.72/share in 2024.

The company is expected to earn $1.94/share in 2025.

The stock sells for 21.52 times forward earnings and yields 2.79%.

Southern Michigan Bancorp, Inc. (SOMC) operates as the bank holding company for Southern Michigan Bank & Trust that provides a range of commercial banking services to individuals, businesses, institutions, and governmental agencies primarily in the southwest Michigan communities. 

The company raised its quarterly dividend by 6.67% to $0.16/share. This is the 14th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 7.74%.

The company managed to grow earnings from $1.21/share in 2015 to $2.28/share in 2024.

The stock sells for 8.33 times earnings and yields 3.37%.

Williams-Sonoma, Inc. (WSM) operates as an omni-channel specialty retailer of various products for home.

The company raised its quarterly dividend by 15.79% to $0.59/share. This is the 20th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 12.73%.

The company managed to grow earnings from $1.71/share in 2015 to $8.91/share in 2024.

The company is expected to earn $8.53/share in 2025.

The stock sells for 19.19 times forward earnings and yields 1.61%.

Substance over Form

I tend to focus my attention on companies that regularly increase dividends to shareholders.

A long history of annual dividend increases is often the result of a strong business, with strong competitive advantages, with high return on investment, which tends to gush rising tides of free cash flows.

It's a symptom of a strong business.

However, that doesn't mean that every dividend increase is treated the same or that you should not look under the hood to understand the drivers behind that dividend increase.

I view dividend increases as signals, that indicate management's stance on the company, industry and economy. They simply are one aspect of my process.

A history of dividend increases will put a company on my map for sure. However, I do additional work from there to determine if a company is worth researching and even potentially adding to my portfolio.

That works includes reviewing trends in:

• Earnings Per Share or FCF/share
• Dividend Payout Ratios
• Growth in dividends per share
• Shares outstanding
• etc

I also try to put dividend growth in context.

A company that just initiated dividends would likely grow those dividends faster than earnings, especially as the dividend payout ratio is starting off on a low point. 

But a company that grows dividends faster than earnings and is not in the initial phase of dividend growth can only afford to do so through an increase in the dividend payout ratio. That has a natural limit to it.

A company that grows earnings and dividends at roughly similar rates is typically what you end up seeing. That being said, there could be some volatility in dividend growth rates from year to year, and also volatility in dividend payout ratios over periods of time.

In addition, I like to discuss the trade-offs between dividend yield and dividend growth in this context.

Namely there are three types of dividend growth stocks:

1. High Dividend Yields but low dividend growth 

2. Those in the Sweet Spot in terms of generating medium dividend yield and medium dividend growth

3. Low Dividend Yield but High Dividend Growth

Naturally, there are trade-offs between higher yields and lower yields, and higher expected growth versus lower expected growth. You also need to take into consideration the payout ratio, the maturity of the industry you are in, the type of business entity you are evaluating as well.

Nothing is a one size fits all approach.

I am mostly saying all of this because I see incorrect statements on the internet, presented as facts (I know, big surprise) that dividend investors are easily fooled by any dividend announcement or dividend increase or dividend streak. I've been doing this for close to 2 decades now, and I have not really seen this happen. Perhaps some novice investors do fall for this trap once or twice, but they learn from it. 

Dividend investors usually look under the hood when investing in a company, meaning they review fundamentals to determine dividend safety and potential for dividend growth, and try to acquire stocks at a good valuation.

This perspective of looking under the hood before you buy is also evident in dividend investors who buy ETF's too. They also look under the hood as well, in order to determine what they are getting themselves into. 

It is important to look under the hood, and try to evaluate the data using some simple logic. It's also important to avoid making a conclusion, without really looking at all the facts. 

Now I am sure there are some that just keep buying without doing any work, but from my experience, those would be a minority.

Most Dividend Growth Investors do tend to do quite a good amount of research, when screening for, researching companies, and building their portfolios. Then a lot of research goes into monitoring, learning and growing as well. They do focus their attention on the data, look under the hood, but most importantly focus on substance over form. 

Relevant Articles:

- Three stages of dividend growth

- Types of dividend growth stocks

- Rising Earnings – The Source of Future Dividend Growth

- How to read my stock analysis reports

Six Dividend Growth Stocks Raising Dividends Last Week

I review the list of dividend increases every week as part of my monitoring process.

Dividend increases provide signaling value to me in my process of evaluating dividend growth companies. I believe it is an important tool in my toolset.

This exercise also helps me quickly review and scan large quantities of companies in order to narrow down the list to the most desirable candidates for further research.

I typically focus my attention on companeis that have managed to increase dividends for at least a decade.

Last week, there were 23 companies that increased dividends in the US. Six of them have managed to increase dividends for at least a decade. The companies include:

DICK'S Sporting Goods, Inc. (DKS) operates as an omni-channel sporting goods retailer primarily in the United States. 

The company raised quarterly dividends by 10.20% to $1.2125/share. This is the 11th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 24.30%. 

The company managed to grow earnings from $2.87/share in 2015 to $14.48/share in 2024.

The company is expected to earn $14.47/share in 2025. 

The stock is selling for 12.90 times forward earnings and yields 2.49%.

Oracle Corporation (ORCL) offers products and services that address enterprise information technology environments worldwide. 

The company increased quarterly dividends by 25% to $0.50/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, Oracle has managed to increase dividends at an annualized rate of 12.79%.

Note that Oracle does not raise dividends every year, but nevertheless it's annual dividend has been increasing for 12 years in a row. Also note that the company seems like it cut dividends in 2013, but that's not the case. There was expectation for a tax hike on dividends in 2013, which is why a lot of good companies ended up pre-paying 2013 dividends in 2012.

The company managed to grow earnings from $2.26/share in 2015 to $3.81/share in 2024.

The company is expected to earn $6/share in 2025. 

The stock is selling for 24.60 times forward earnings and yields 1.35%.

Realty Income (O) is a real estate investment trust which invests in diversified commercial real estate. It has a portfolio of 15,450 properties in all 50 US states, the UK and six other countries in Europe.

Realty Income raised monthly dividends to $0.2685/share, which is a 4.47% increase over the dividend paid during the same time last year. Note that Realty Income raises dividends several times per year. This new dividend is 0.20% higher than the previous dividend they paid, but a cool 4.47% increase over the dividend paid during the same time last year.

Realty Income is a dividend aristocrat which has increased annual dividends since 1994. Over the past decade, the company has managed to grow dividends at an annualized rate of 3.60%. 

Between 2015 and 2024, Realty Income managed to growth FFO from $2.77/share to $4.02/share.

Realty Income is expected to generate $4.31/share in FFO in 2025.

The stock sells for 12.96 times forward earnings and yields 5.68%.

SpartanNash Company (SPTN) distributes and retails grocery products in the United States of America. It operates through two segments, Wholesale and Retail. 

The company raised quarterly dividends by 1.15% to $0.22/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 6.10%. 

The company is expected to earn $1.76/share in 2025. In comparison, it earned $1.67/share in 2015.

The stock is selling for 11.30 times forward earnings and yields 4.38%.

TE Connectivity plc (TEL) manufactures and sells connectivity and sensor solutions in Europe, the Middle East, Africa, the Asia–Pacific, and the Americas. The company operates through three segments: Transportation Solutions, Industrial Solutions, and Communications Solutions. 

The company increased quarterly dividends by 9.20% to $0.71/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 8.50%. 

The company managed to grow earnings from $5.98/share in 2015 to $10.40/share in 2024.

The company is expected to earn $8.08/share in 2025. 

The stock sells for 17.47 times forward earnings and yields 1.95%.

UDR, Inc. (UDR) is a multifamily real estate investment trust that focuses on managing, buying, selling, developing and redeveloping attractive real estate properties in targeted U.S. markets.

The REIT raised quarterly dividends by 2.38% to $0.43/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 5.26%. 

UDR managed to grow FFO from $1.68/share in 2015 to $2.30/share in 2024.

This REIT is expected generate $2.51/share in FFO in 2025. 

The stock sells for 16.96 times forward FFO and yields 3.97%.

Relevant Articles:

- Five Dividend Growth Stocks Raising Dividends Last Week

- Realty Income (O): A look at the past five years

- 19 Dividend Growth Stocks Raising Dividends for Shareholders

- Twenty Dividend Growth Stocks Raising Dividends Last Week