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.
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.
In that vein, here's a rundown on two stocks that increased dividends this month…
"I Love the Smell of Roundup in the Morning!"
Current projections peg the world population at somewhere around nine billion in 2050. That's good news for agribusiness, of course. Because grain production will have to more than double to meet that demand.
And Monsanto (NYSE:MON), which traffics in yield-improving biotechnologies, is going to catch the windfalls of that rising demand. It's the key player in that corner of the agricultural market, raking in nearly $15 billion in sales on a trailing-12-month (TTM) basis.
With earnings per share up 27.7% over last year, management was compelled to drive its dividend payout up by 15% this month. The newly announced quarterly dividend of $0.43 amounts to a projected yield of only 1.77%.
That's barely a pittance. But Monsanto grows its dividends aggressively. Case in point: Over the last five years, it's sent payouts higher annually by 14.96% on average. And the company has seen over 11 straight years of increases.
This, while keeping the earnings ceiling far overhead. Its dividend payout ratio (DPR) is just a hair under 30.9% on a TTM-basis.
Translation? Monsanto could keep growing dividends at present rates into the foreseeable future. And that means long-term compensation for the (initially) paltry yield.
And if the company is going to keep shareholders happy, it will have to keep sending dividends higher. In short, the stock no longer enjoys substantial equity growth, which means a large chunk of returns will have to come in the form of cash distribution.
Clearcutting Non-Core Segments
The recovery in housing is old news. Real estate bottomed out months ago, and it's now on an upward trajectory in most parts of the country.
This rejuvenation has been a boon for Weyerhaeuser (NYSE:WY), which relies on real estate for 12% of its business. Despite the turnaround, however, the company is exploring strategic options to sell its homebuilding unit.
Such a sale would bring the company closer to its core product line - timberland, wood products and cellulose fibers. And it wouldn't be Weyerhaeuser's first move in that direction.
In fact, the company has been restructuring itself heavily for almost a decade.
In 2008, the company shed some weight through the divestiture of its packaging business. Then, in 2010, it converted to a REIT to become more tax efficient.
The expenses involved in the process caused a direct hit to its earnings, unfortunately, compelling management to slash dividends in 2008 - from $0.60 to $0.25, and then again to $0.05 in 2010.
Still, the company has been a dividend payer for 35 years and running, growing payouts substantially for the most part.
The company declared a further increase this month of 10%, which amounts to a quarterly dividend of $0.22 and a projected yield of 3.18%.
Bottom line: Like I've said, timberland is recession resistant and a great hedge against inflation. In other words, Weyerhaeuser - especially now that it's unloading its real estate arm - would make an excellent defensive stock. One that pays steadily increasing dividends, to boot.
Pouring More Payout-Gravy on the Dividend-Poutine
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 (NYSE: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. Fashion 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 (NYSE: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 (NYSE: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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.