I thought I would start a series of threads about the various factors I consider when deciding whether to purchase a particular dividend growth stock. My analysis is not especially sophisticated, but I think it is pretty similar in many ways to that of many DG investors. Let me know what you do differently.
First, of course, is that the stock that has been consistently growing its dividend for a number of years. (Otherwise, it is not a DG stock!) Raising the dividend year after year shows a corporate commitment to paying and raising the dividend. And in a well-run company, it means that the company has been successful in growing its earnings over time, which allows for the payment of the increasing dividend. As the streak gets longer, the company may become known as a reliable dividend growth stock, which also increases the external pressure to keep management focused on running the company well and with a focus on the dividend.
There are no magic numbers about how long of a streak I want to see, and it depends a lot on the company. My portfolio includes streaks of just a few years as well as "dividend champions" such as Johnson & Johnson (JNJ), which has been raising its dividend every year for 50 years. As a very general matter, the longer the streak, the better. I certainly give more points to a company that has been raising the dividend for 15 years than to one that has only a 5 year streak. But I do not give much more weight to a 50 year streak than a 25 year streak. I guess I figure that after 25 years, the company is about as invested as it will ever be in continuing to raise the dividend annually.
I give extra credit to some short-streak companies because I believe they fully embrace the dividend growth approach. PM is a perfect example of this. Philip Morris International does not have a long streak of raising dividends, because it has only been a separate corporate entity since 2007 or 2008, when it was spun off from what is now Altria (MO). But its pedigree as a DG stock is impeccable. Its former parent, MO, has been growing its dividend for 44 years now, and since the spinoff, PM has raised the dividend generously each year (in addition to a very healthy stock buyback program). PM is committed to returning profits to shareholders, and so even though its streak is technically only 4 years (since the spinoff), I score PM as if its streak was much longer.
On the other hand, a company with a short streak -- but which you believe has the means and intent to raise the dividend aggressively -- may prove very lucrative. In some cases, a stock that has initiated its dividend in the past few years may be able to grow that dividend more quickly than a more mature company. This could also lead to more dramatic share price appreciation. These plays may be much more speculative from a traditional dividend growth perspective, but I like to have a couple of these in my portfolio to add diversification and potential faster share price gains. (I think of AAPL and F in this category.)
You have to keep in mind that a long streak is no guarantee of future dividend raises, or that the dividend will never be cut. Back in the 2008-2009 crisis, lots of reliable dividend growers cut their dividends (such as GE and PFE). (I am personally hopeful that the crisis weeded out many of the dividend growth stocks that were vulnerable, but we'll never know until the next crisis!) But a long streak is an important indicator of the company's philosophy about how profits should be returned to shareholders.
And of course the dividend streak cannot be considered in isolation. For example, raising the dividend is less meaningful if earnings are not also rising at the same time. If the dividend is growing faster than earnings, then it means that the company's payout ratio is increasing. If the payout ratio gets too high, the dividend may not be sustainable. I'll take up earnings, payout ratio, and other criteria in separate posts soon.
Update:
Here's Part 2: Current Dividend Yield and Dividend Growth Rate
Here's Part 3: Payout Ratio
Here's Part 4: Earnings Growth
First, of course, is that the stock that has been consistently growing its dividend for a number of years. (Otherwise, it is not a DG stock!) Raising the dividend year after year shows a corporate commitment to paying and raising the dividend. And in a well-run company, it means that the company has been successful in growing its earnings over time, which allows for the payment of the increasing dividend. As the streak gets longer, the company may become known as a reliable dividend growth stock, which also increases the external pressure to keep management focused on running the company well and with a focus on the dividend.
There are no magic numbers about how long of a streak I want to see, and it depends a lot on the company. My portfolio includes streaks of just a few years as well as "dividend champions" such as Johnson & Johnson (JNJ), which has been raising its dividend every year for 50 years. As a very general matter, the longer the streak, the better. I certainly give more points to a company that has been raising the dividend for 15 years than to one that has only a 5 year streak. But I do not give much more weight to a 50 year streak than a 25 year streak. I guess I figure that after 25 years, the company is about as invested as it will ever be in continuing to raise the dividend annually.
I give extra credit to some short-streak companies because I believe they fully embrace the dividend growth approach. PM is a perfect example of this. Philip Morris International does not have a long streak of raising dividends, because it has only been a separate corporate entity since 2007 or 2008, when it was spun off from what is now Altria (MO). But its pedigree as a DG stock is impeccable. Its former parent, MO, has been growing its dividend for 44 years now, and since the spinoff, PM has raised the dividend generously each year (in addition to a very healthy stock buyback program). PM is committed to returning profits to shareholders, and so even though its streak is technically only 4 years (since the spinoff), I score PM as if its streak was much longer.
On the other hand, a company with a short streak -- but which you believe has the means and intent to raise the dividend aggressively -- may prove very lucrative. In some cases, a stock that has initiated its dividend in the past few years may be able to grow that dividend more quickly than a more mature company. This could also lead to more dramatic share price appreciation. These plays may be much more speculative from a traditional dividend growth perspective, but I like to have a couple of these in my portfolio to add diversification and potential faster share price gains. (I think of AAPL and F in this category.)
You have to keep in mind that a long streak is no guarantee of future dividend raises, or that the dividend will never be cut. Back in the 2008-2009 crisis, lots of reliable dividend growers cut their dividends (such as GE and PFE). (I am personally hopeful that the crisis weeded out many of the dividend growth stocks that were vulnerable, but we'll never know until the next crisis!) But a long streak is an important indicator of the company's philosophy about how profits should be returned to shareholders.
And of course the dividend streak cannot be considered in isolation. For example, raising the dividend is less meaningful if earnings are not also rising at the same time. If the dividend is growing faster than earnings, then it means that the company's payout ratio is increasing. If the payout ratio gets too high, the dividend may not be sustainable. I'll take up earnings, payout ratio, and other criteria in separate posts soon.
Update:
Here's Part 2: Current Dividend Yield and Dividend Growth Rate
Here's Part 3: Payout Ratio
Here's Part 4: Earnings Growth
