A Dividend Increase Roundup
Make no bones about it, increases are at the heart of every worthwhile dividend investment. Without them, your money isn’t working nearly as smart as it could be.
This is especially the case for longer-term holdings.
Sure, in the short term, compared to a lower-yielding dividend growth stock, a fat initial yield is going to be the bigger breadwinner.
But down the line, you’ll see the dividend grower catch up and begin outpaying the former.
And every year after that inflection point – when the growth stock surpasses the holdings value of the higher-yielding stock – that gap will only widen further, in favor of the dividend grower.
It’s a patient investor’s strategy, but it pays off big time.
Because dividend growth is so important, when a company announces an increase, it’s always a great excuse to check it out. After all, as is often the case, one increase foreshadows another.
In that vein, here’s a rundown on three dividend stocks (including one from Louis Basenese) that have two things in common: moderate yields plus recently announced dividend increases.
Sometimes Quality Alone Doesn’t Cut It
Just like McGraw-Hill – which Louis Basenese breaks down toward the end of this article – 3M (MMM) is an extremely mature dividend payer.
Its most recent increase of 8% to $0.63 per share marks the 55th consecutive year of increases and the 96th year of payouts.
That’s a long, long line of raises, considering that even 10 years of increases is enough to put a dividend payer into the “proven history” camp.
Where 3M falls short, however, is that while the company has certainly been increasing its dividends, it hasn’t done so aggressively enough.
Its five-year annual dividend growth average of 4.23% simply isn’t enough to make up for its comparatively average yield of 2.3%.
Remember, a “small potatoes” yield can outshine if – and only if – it’s coupled with aggressive dividend growth.
So while 3M’s dividend is safe and consistent increases are a safe bet, there’s far better growth to be had elsewhere.
Toying Around With Dividend Investors? No Way
Where 3M falls short, Mattel (MAT) goes the distance…
Not only has the company been paying – and consecutively raising – its dividend for the last decade, it’s made a habit of doing so vigorously.
Its most recently declared increase of 16%, to $0.36 a share, comes at the tail end of a five-year average dividend growth rate of 11.26%. And in the last three years, the figure looks even healthier at 18.76%.
Better still, Mattel’s yield checks in at 3.57%, giving it an even greater advantage than the other stocks outlined here.
And while its dividend payout ratio (DPR) has definitely climbed into steeper territory over the last 10 years – it hit 71.4% in 2008 – it’s since decreased to a current, more comfortable DPR of 47.6%. So there’s no current danger of payments or increases hitting a brick wall.
The one drawback? Mattel is slightly overpriced at the moment, trading at 16.6 times earnings. That’s both above its own five-year average P/E of 14.1 and the S&P 500 average of 15.6.
But with a slightly lower valuation, the stock would make an excellent long-term dividend growth play.
Before we go, Louis Basenese sounds off with one more dividend payer with a recent increase…
If anyone asks you what a solid, dividend growth stock looks like, point them to McGraw-Hill (MHP).
Not only has it been doling out dividends every year since 1937, it’s been heavy on the increases, too, raising its dividend payments annually for 40 years running.
And it’s been no slouch about it, either. Its most recently declared increase checks in at 9.8% – up from $0.25 to $0.28. In fact, that increase is roughly in-line with its historical annual average of 9.6% since 1974.
Now, there’s no such thing as a sure bet when it comes to investing, but based on historical precedent, the expectation that McGraw-Hill will continue to pay and increase its dividend is about as sure as you’re going to get.
What’s more, with a current dividend payout ratio of 36.9%, any ceiling to such increases is a long way off. And considering it’s been in the 30% to 37% range for the last decade, there’s little chance of it getting squeezed in the foreseeable future.
Granted, the 2.39% yield is just a hair better than the S&P 500 average of 2.1%, so don’t expect cash windfalls in the short run. But if you’re willing to go long, you could do far worse.
Bottom line: Don’t be fooled by yields – big or small. While they remain an important consideration when screening for dividend stocks, by no means are they the most important consideration.