Putting Companies On 'Dividend Growth Probation'

by: Mike Nadel


To be assured a reliable income stream in retirement, I need the companies I own to grow dividends annually.

Companies that fail to grow dividends by at least 5% in any year might be placed on probation.

Here I offer examples of four companies that I put on probation, how the process works and what became of them.

When one of the companies in my Dividend Growth Investing portfolio behaves badly, I make it sit in the corner, I don't give it any more allowance, and I keep a very watchful eye on it. And if it doesn't clean up its act, I will show it the door.

A parent might call this tough love. We investors can call it "Dividend Growth Probation."

I want my overall stock portfolio to experience at least 5.5% annual dividend growth, and I'm happy to report it is doing better than that. If the income is to keep climbing as my wife and I prepare for retirement and beyond, each holding must do its job. So when a company doesn't raise its dividend by at least 5% in any year, or when it delays an expected increase, I might put it on probation for the following 12 months.

What happens after a company goes on probation? I don't buy more shares of it. I monitor it more closely. And if it still hasn't raised its dividend to an acceptable level over the ensuing year, I strongly consider selling it.

My goal is to build and maintain a portfolio that will provide me and my wife with a reliable, sustainable, growing income stream during retirement. If we can't count on the dividend, it mucks up the works.

Here is how I have dealt with four companies that had unsatisfactory or delayed dividend increases.

Waste Management (NYSE:WM)

I bought WM in July 2012 even though it recently had raised its dividend by only 4.4%. It had grown dividends by an average of 10.9% the preceding five years, so I thought this was but a hiccup. It also was undervalued, and I love a good bargain.

When management announced a mere 2.8% increase in February 2013, however, WM went on probation.

I ended up not giving it a full year. When its performance stagnated and I grew concerned about its soundness as an investment, I sold it in September 2013 for a 47% profit and used the proceeds to top off several core positions at attractive value points.

Postscript: This past February, WM raised its dividend by only 2.7%. And its price has barely budged since I sold it. Good riddance, laggard.


I acquired INTC in two batches in the spring of 2012. It had been an aggressive dividend grower, averaging 19.8% annually the previous five years. In May 2012, it announced a 7.1% raise. That was mildly disappointing given its previous pace, but it was acceptable.

Over the next year, Intel faced pressure from declines in desktop computing and from its lackluster results in mobile technology. Its price tanked, making me cranky even before May 2013 came and went with no dividend raise.

On probation INTC went. And as I grew more disenchanted with its place in my portfolio, I made the painful decision to sell at a loss in August 2013 and allocate the funds elsewhere.

Postscript: Intel still hasn't raised its dividend. Its price has mostly recovered, though, so kudos to folks who patiently held and/or who bought during its swoon.

Deere (NYSE:DE)

The day after I sold Intel, I used the proceeds to buy Deere. I liked the company's potential and I really liked that it was undervalued. Oh, and I loved its dividend history: 16.3% average annual raises over the previous decade.

Then, this past February, 12 months after its previous dividend hike, DE didn't announce an increase. Probation time! I was fairly confident the raise would come because Deere often had irregular patterns - no increase in the 2009 calendar year but three hikes from May 2010 through May 2011. So I planned to give it time, but I wasn't buying more in the interim.

Then, on May 28, Deere announced a delightful 17.6% raise. I immediately took the company off probation and also decided to top off my position at the new, improved 2.6% yield mark.

Postscript: The probation process worked. Deere even has edged up in price since the divvy hike. I actually wish it would hold tight or pull back a bit because I'd like to make one more DE buy in my wife's 401(k) account when money becomes available next month.

Wal-Mart (NYSE:WMT)

I bought WMT in four tranches from July 2013 through this past January. Besides being an iconic name in retail, it had been one of the best dividend growers around, with an average increase of about 18% over the previous 10 years. Five months before my first buy, it announced an 18.2% raise.

However, like many companies in the sector, Wal-Mart struggled to grow earnings. In February, WMT gave investors a measly 2.1% dividend hike. Even some fervent supporters were stunned, especially considering WMT's payout ratio is less than 40%.

Rather than top off my Wal-Mart position as planned, I placed it on probation, and that's where it sits today.

Postscript: WMT has been too good a company for too long to make a rash decision about its future in my portfolio, so I plan to give it the full year to see what happens. I have pretty high expectations for the next dividend announcement in February 2015.

More Examples... And A Few Exceptions

I heard about the probation concept from "Chowder," a Seeking Alpha instablogger who also regularly offers great insight within comment streams of articles. A DGI practitioner for years, Chowder has mentored many a neophyte investor, including yours truly.

When Nucor (NYSE:NUE) grew its dividend less than 1% in 2010, he put the company on probation. When its next raise was similarly anemic, he sold it:

"I'm not going to hold a company yielding 3% with a 1 or 2% dividend-growth rate. Not if my focus is the income."

Chowder also manages a portfolio for his son called Project $3 Million. After Sysco (NYSE:SYY) had a sub-5% dividend raise in 2011, he placed it on probation in his own portfolio and eventually sold. But due to SYY's quality and financial strength, he kept it in his son's portfolio even though its DG has remained low:

"They are clearly the gorilla in the room in their sector. I decided that as long as they kept raising the dividend, no matter how small, over time the reinvested dividends will have purchased many more shares than would have been possible if SYY was outperforming the market. With as many years as my son has to invest, this would be an ideal time for him to accumulate a beaten-down, high-quality company."

In other words, there can be (and should be) exceptions to the probation rule. I have a few of my own.

For example, I don't expect 5% dividend growth from my utilities, telecoms and REITs, all of which offer high current yield. I likely won't place them on probation unless they freeze or cut their dividends.

ConocoPhillips (NYSE:COP) did not increase its dividend for more than two years as it went through the process of spinning off Phillips 66 (NYSE:PSX). I knew the situation when I bought COP in 2012, and the company announced a 4.5% raise last July. It has been a superb investment and still has room to run. Nevertheless, I'd like to see a more robust dividend hike next month.

Finally, for companies that have been paying dividends every single year for decades - or for more than a century in the case of General Mills (NYSE:GIS) and Exxon Mobil (NYSE:XOM) - I will be very open-minded should they ever have a lower-than-ideal dividend raise.

Rules are important, but so is common sense. To me, probation simply offers an opportunity to pause and closely examine a company that isn't doing its job to ensure my family's future financial well-being.

As the Deere case demonstrated, just because I stick one of my companies in the corner, it doesn't necessarily mean I'll disown it.

Disclosure: The author is long COP, DE, GIS, WMT, XOM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.