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 then out-pay the former. And every year after that, the gap will only get wider 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, 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.
Target Corp. (TGT)
On June 12, the Midwestern-based, countrywide retail giant declared a raise to its payout, from $0.36 to $0.43.
The 19.4% increase hardly comes as a surprise, however, as the company has been raising its dividend for 41 consecutive years.
That kind of long-running dividend history is an excellent indicator that future raises are virtually assured, year in and year out. (The reason, of course, is simple. If shareholders don't get what they've grown accustomed to - in this case, regular cash payments - they head for the exits.)
What's more, as well as being doggedly consistent, the company has also managed to grow payouts at an aggressive pace. For the last three years, raises have amounted to an average growth rate of 29%.
This penchant for substantial increases also makes up for its yield of 2.5% - barely above the S&P 500 average of 2.2% - which, on its own, wouldn't be enough to merit consideration. As always, high growth rates beat high yields in the long term.
Target's stock is currently trading at 16.2 times earnings. Right in line with the average S&P 500 price-to-earnings (P/E) ratio of 16.9, investors would be in no way overpaying for an income-oriented dividend grower.
And they wouldn't be sacrificing performance, either. Year-to-date, Target has posted gains of 17.63%, compared to the S&P 500's gains of 15.73% over the same period.
The world's largest heavy-equipment manufacturer, Caterpillar, raised its dividend 15% on June 13, from a quarterly payout of $0.52 to $0.60.
The raise amounts to a yield of 2.85%, which clocks in at just above the S&P 500 average of 2.2%.
Unlike Target, however, Caterpillar doesn't quite have the impressive growth metrics to make up for the middling yield.
While it has, indeed, been increasing its dividend for 19 consecutive years - more than enough to assure investors of raises on an annual basis - its three-year average dividend growth rate of 7.8% is just shy of the 10% needed to put it on the dividend-growth stock radar.
Having said that, the dividend is by all accounts safe from being cut or plateauing anytime soon. Because the stock sports a low-end dividend payout ratio (DPR) of just 20.2%, even if earnings took a deep dive, the cash payouts probably wouldn't skip a beat.
Bottom line: Given the stock's lackluster bag of dividend metrics, plus poor stock performance over the last year - it posted a loss of 2.24% - even its below-average P/E of 11.4 is simply too expensive for a dividend stock.
As I've said before, tech stocks are taking the dividend world by storm.
In fact, according to the latest research from FactSet, when it comes to aggregate dividend growth, technology continues to lead all other sectors by a country mile - growing 49.5% year over year.
Just how far ahead of the pack is that? Well, the runner up (financials) didn't even come close to keeping pace, growing only 20.2% over the same period.
But just because tech companies suddenly want to put cash in your pocket doesn't mean you should jump at the chance.
The reason is simple. Technology companies are newcomers to dividends. They don't have history to back up their dependability, and just a few quarters of payments and increases aren't enough to go on.
In other words, income investors need to watch out, because untested waters are a dangerous thing.
Look no further than Oracle (ORCL) for proof…
Behind every dividend investment worth your time, money and risk, there are two essential values: consistent growth and substantial yield.
And despite its recent dividend increase of a healthy-sounding 100%, Oracle has neither.
This marks only the second time the company has raised its payouts - with the exception of a special dividend paid last November - since initiating its dividend program in 2009.
Now, even on the basis of the latest increase, Oracle's projected yield of 1.59% still sits well below the S&P 500 Index's average yield of 2.2%.
And given the fact that the 10-year Treasury yield is now on the rise - as of this writing, it's at 2.64% (the highest since August 2011) - Oracle will have to do a heck of a lot more to entice investors than offer them such a pittance.
Especially since the stock's performance has been lackluster at best.
While the Nasdaq composite managed impressive gains year-to-date - forget about the last two weeks for a moment, please - returning 9.68%, Oracle is down 9.41% over the same period.
Bottom line: If tech companies are going to pay dividends, the more the merrier. Over time, many will undoubtedly prove to be healthy, growing - yes, even defensive - income investments. Stocks like Microsoft (MSFT) and Intel (INTC) have already proven that it can be done.
But as it stands, Oracle has some serious work to do going forward before it becomes a viable dividend play.
Everything Oracle Isn't
Like technology companies, financials have also been ahead of the game in dividend growth.
The major reason for this is that many were forced by the Federal Reserve to cut or suspend dividends during the banking crisis.
But now the Fed is giving most banks freer rein to allocate capital. So they're (once again) putting shoulder into their dividends and raising payouts to previous levels.
Fifth Third Bancorp (FITB) is a prime example.
Over the last three years, it's revitalized its dividends in a huge way, achieving an average annual growth rate of 129%.
Its latest increase of 9% amounts to a projected yield of 2.71%, which checks in above both the S&P 500 average and the latest 10-year Treasury yield.
What's more, the raises will likely continue at a brisk pace. Its current dividend payout ratio of 24% isn't even close to its previously sustainable height of 52% in 2005.
And because earnings are also on the rise, it should be a few years before aggressive dividend raises begin to level off.
Better still, the stock has been outperforming - posting a gain of 39% over the past year, compared to 22.87% for the S&P over the same period.
And for all that, shares remain cheap with a current price-to-earnings (P/E) ratio of 11. That's well below the current S&P 500 P/E of 16.9.
Bottom line: Add it all up, and Fifth Third is an excellent way to play the rebound in financials for a solid, growing income stream.