DG Thesis Still Valid?

[Kerim]

Hey folks,

Clearly I haven't been around in a while. Sorry about that, but life seems to live me more than I live it oftentimes. Hoping to change that.

Anyway, my portfolio still chugs along, throwing off a nice pile of dividends, but of course with the market where it is, most of the new worth gains have been from capital appreciation.

But I just looked though all of my DG holdings, and I gotta say, the dividends just aren't growing like they used to. Hopefully it is just a lull in the current climate, but it seems like most of my holdings are increasing their dividends on the order of 1 to 4 percent per year, which feels pretty underwhelming. One notable exception is AFL, which I still love, but its current yield is pretty underwhelming.

In some cases, it is because the yield has gotten too high, and in others it feels like the company is just being more conservative, or perhaps more focused on buybacks.

So is the DG thesis breaking down, or are we just in a lull? If I were just starting out today, I'm not sure I'd see it the same as I did 20 years ago.

[Dividend Watcher]

Kerim,

It's nice to see you back. I know how it is with life getting in the way of important things like discussing investing.

I retired 3 months ago and am still working on re-organizing our finances. During those 3 months, I've struggled with transferring my 401(k) balances and also, as my father's estate was settled in the same time frame, getting everything transferred to my name and allocating that money. I keep saying I ought to start a thread on the retirement journey but, as you said, life keeps getting in the way.

Back to the topic at hand ...

I too have noticed the slow down in some of the dividend increases.

One of the problems it seems is that, as you stated, companies are getting rewarded for share buybacks -- not investing in R&D, paying down debt, or getting more efficient in delivering their product or service. Since many pay and bonus packages have some form of reward for higher share prices, there's little incentive to do much of the above other than to leave a little more corporate cash to pay the C-suite and the board higher salaries. You see very little to no reaction when a company announces a dividend increase but you do when a share buyback plan is announced or re-authorized.

Another issue, I believe, is that the economy and many companies are still adjusting to the pandemic disruptions and the subsequent spike in inflation. I'm pretty confident that those factors caused a lot of zigs when company management was planning to zag, disrupting many long-term plans.

There are probably other company-specific factors also involved. Take HSY or MDLZ for example. They use cocoa extensively in their products. Not only has the price of cocoa beans skyrocketed, availability is also being impacted due to problems with the cocoa agriculture. I'm not sure how long both companies can maintain their shareholder-friendly dividend policies until the input markets stabilize. HD and LOW are still struggling with the disruptions in the housing market.

However, there are still companies out there willing to share their growing profits with shareholders.

Like you, I too have been a happy long-term holder of AFL. The last three increases have been amazing. Yes, the dividend is sill in the low 2% range but it's been that way for the last 15ish years. I'm not expecting the increases to match the last few going forward but am pretty confident those dividend deposits will keep growing.

Does DGI work? It has for me for the last 17 years. About 1 year before I retired, I started working on a budget for retirement trying to get as realistic as possible. Luckily, I keep my finances in a financial program and could look back for 5-7 years trying to estimate. I was pretty close since I've retired despite inflation. It turns out that with Social Security and my dividend income, we're about 10-12% above our estimated expenses and there's no need to touch the principal in the foreseeable future. I didn't cut the budget to the bone but I didn't plan extravagant vacations either.

One thing that I did was get rid of some slower growers that had a low current yield and either moved to a higher yield or more amenable dividend growth history or both.

Would someone just getting interested in investing choose to adopt some form of the DGI methodology today? Some yes but, overwhelmingly, I doubt it. With all the noise on social media and online web sites, it seems many are thinking they will get rich quick. I remember thinking that myself when I was younger until the double whammy of the dot.com bubble and the Great Recession forced me to look for a more methodical and reasoned approach. I can still remember, after completing a successful trade on Yahoo! in the late-90s, saying, "I can't believe I just bought it with a P/E in the 70s." I fear that may be the tipping point again.

Wonder what some others think.