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Raises All Around: Dividend Increases for the Month of August (Part 2)

Every month, I do my damnedest to impress upon D&I readers the unbeatable importance of dividend increases.

After all, it’s consistent, aggressive growth – not fat, initial yields – that will grant you long-term security and wealth.

Accordingly, last week I started rounding up notable companies increasing dividends in August. Like I said then, it’s a great way to discover new stocks and revisit old ones.

Now, I’m back today to wrap it up with the second part.

So let’s get to it…

Pouring More Payout-Gravy on the Dividend-Poutine

Louis Basenese has singled out Royal Bank of Canada (RY) as one of the most compelling Canadian bank stocks around time and time again.

And for good reason. The bank insists on giving back higher amounts of cash to shareholders at every opportunity.

Case in point: Not only did it post better-than-expected quarterly results, the bank came through for shareholders by declaring yet another dividend increase.

The 6% raise from $0.63 to $0.67 brings its yield to 4.25%, or just over twice the average yield for the S&P 500.

It’s part of a growing pattern of good behavior, too. Since the first quarter of 2011, the bank has raised its dividend five times, for an average growth rate of 7.21% annually.

Better still, those increases won’t be hampered by earnings any time soon, because Royal Bank’s dividend payout ratio (DPR) has actually fallen since starting out on the road of dividend growth.

Bottom line: Royal Bank of Canada not only offers growth in the dividend department, its stock price continues pushing higher, as well, returning 16.46% over the last year. To boot, at current valuations, it’s a bargain, trading at only 11.9 times earnings.

Changing Habits, Steady Growth

There are headwinds aplenty for big tobacco: increasing governmental regulation, rising tax rates and savvier anti-smoking educational measures.

Altogether, these factors are driving sales slowly downwards. But despite volume decreasing at about 4% a year, the end of the tobacco business is still a long way off.

I’m not the only one who thinks so, either. Analysts at Morningstar project that tobacco major Altria (MO) – which, given its size, is basically a litmus test for the tobacco industry at large – is “poised to generate steady medium-term earnings growth” for the foreseeable future.

Altria has long been considered a dividend growth go-to in the income world, so it’s unsurprising that the company continues using rising earnings to buff payouts – especially considering the general, albeit slow, cultural shift away from its core product.

This month the company drove its quarterly payout up 9.1%, from $0.44 to $0.48 per share, garnering it a three-year average growth rate of 8.45% annually. This, after 47 years of consecutive dividend raises.

It’s unlikely that anything short of an earnings brick wall will stop that kind of historical momentum in its tracks. For proof, look no further than 2008, when Altria’s DPR traveled into the plus-100% range, but its dividend rates kept on chugging. (Since then, its DPR has lowered to a more sustainable 80%.)

Bottom line: If current cultural patterns continue unchecked, in 20 years, Altria might be lucky to even be listed on major exchanges, let alone a dividend champion. But for the medium term, its 5.62% yield and impeccable payout growth remain as viable (and attractive) as ever.

You Might As Well Invest in Hammer Pants

Specialty retail clothing is a slippery industry. Fashions trends are hard to predict, and when habits move against a company’s niche, look out below.

You only have to look at J.C. Penney (JCP) for a recent example of the horror show that results when a retailer becomes solidly irrelevant. It was once a mainstay in its market. Now, it’s on the outs, and I’d be shocked if it ever manages to recover.

It’s for that reason I’m wary of investing in clothing retailers for long-term income. Not only is the sector anything but recession proof, the players within it rise and fall at the drop of a hat.

And The Gap (GPS) is no exception.

Sure, the company’s earnings and revenue have been on a steady rise since 2010. Yes, the company drives its annual dividend growth at aggressive rates, achieving a three-year average of 14.14%. And to top it all off, it’s kept its DPR at more than manageable levels, currently just 25.4%.

If the company were part of any other sector, these figures might even be enough for me to overlook its low-end initial yield of 1.96%.

But it’s not. And investing for income means investing for the medium to long term. And what the face of fashion will look like in 10 years is anybody’s wild guess.

So despite the fact that The Gap continued its unbroken, nine-year string of increases by pushing its payout up by 33% this month, look elsewhere.

Safe investing,

Ryan Anders