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Raises All Around: Dividend Increases for the Month of September (Part 1)

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, a fat initial yield is going to be the bigger breadwinner compared to a lower-yielding dividend growth stock.

But down the line, you’ll see the dividend grower catch up and then out-pay the former. And the gap will only get wider every year after that.

It’s a patient investor’s strategy, but it pays off big time.

Because dividend growth is so important, increases are always a great excuse to check a company out. After all, one increase often foreshadows another.

That’s why, once a month, I look back on recent dividend increases to see which companies continue to put more shoulder into their dividends. It’s a good way to discover new stocks and revisit old ones.

In that vein, here’s a rundown on two stocks (with more to follow in the next issue) that increased dividends this month…

A Portfolio Essential

There are very few companies out there that can lay claim to a dividend history as exemplary as McDonald’s (MCD).

The company has been increasing payouts for 36 straight years, giving the solid impression that it’ll remain a dividend grower for life.

It’s unsurprising, then, that it declared another quarterly raise, from $0.77 to $0.81 per share. The increased dividend represents a comfortably above-average yield of 3.34%.

Granted, the rate of dividend growth slowed over the recession, dragging the company’s five-year average dividend growth rate (DGR) down to 4.37%. But since then, it’s picked up speed, driving its three-year average up to 11.89%.

In other words, McDonald’s has not only made increases a priority, it’s prioritized making those increases count, as well.

Keeping dividends front and center is essential for the company, because as far as price appreciation goes, the stock is an underperformer.

Case in point: Year-to-date, while the S&P 500 managed to pump out gains of 21.76%, McDonald’s clocked in much lower, returning just 12.47% over the same period.

But remember, the upside to McD’s tepid growth in a bull market is the fact that it outperforms during bear markets. Just look back to the most recent recession for proof. McDonald’s only fell 18%, compared to the 45% that the S&P 500 gave up.

Bottom line: McDonald’s is a recession-proof, dividend-growth company. And that’s exactly the kind of stock every portfolio needs.

Another One for the Books

What I recently said about Altria (MO) – namely that “there are headwinds aplenty for big tobacco: increasing governmental regulation, rising tax rates and savvier anti-smoking educational measures” – holds true for Philip Morris (PM), as well.

There’s no getting around it: These factors are driving tobacco sales slowly downward. Current estimates peg the contraction at around 4% a year.

But like I said, the end of the tobacco business is still a long way off. Bad habits die hard. And industry majors like Philip Morris will continue to thrive for the foreseeable future.

In the meantime, to alleviate these long-term concerns – and, most importantly, to supplement the fact that big tobacco is now too big to offer much in the way of price appreciation – cash payouts will remain essential to providing shareholders with value.

Altria knows this, and so does Philip Morris. This month it declared a 10.6% bump to its quarterly dividend, sending its yield from 3.76% to a projected 4.16%.

This increase comes in the midst of similar raises, which over the past five years have amounted to an average DGR of 32.89%.

Of course, such an overly aggressive growth rate can’t last forever. So on a shorter-term basis, it’s headed toward a saner level, clocking in at 13.68% over the last three years.

Add it all up – and throw in a moderate price-to-earnings ratio of 17.5 – and Philip Morris, like McDonald’s, has all the makings of a steadfast dividend growth stock worthy of any portfolio in need of income.

Safe investing,

Ryan Anders