By Eli Inkrot
Larry Ellison wakes up each day with an extra $600,000 in cash. Steve Wynn is paid a cool grand for an hour on his golf course. And if Bill Gates dropped a 20-spot, no worries; he’d make it back before it hit the ground. Oh yeah: And they do this without touching their salary. How do they do it? Dividends.
It’s the old tale of the rich getting richer, but it isn’t much of a secret. Dividends are a portion of a company’s profits paid to its shareholders. As an owner, it’s nice to be paid. As an income investor, it’s nice to know when you will be paid. Trouble is, the economy is cyclical: An earthquake hit Japan, there’s unrest in Africa and commodity prices are worrisome. In other words, it is difficult to predict how companies will perform.
But there is hope. Dividends come from profitable companies. True, future earnings can be difficult to forecast. However, dividend policy is often much more predictable. Companies with strong histories of paying dividends, or better yet increasing them, usually signal their strength regularly. They consistently announce and pay dividends at certain times.
Wouldn’t it be great if you could capitalize on this consistency? You can. If you can predict an increased dividend announcement, the benefits are two-fold:
- It almost immediately increases your dividend yield. If you buy before the increase announcement, your yield on cost will increase.
- The good news of a dividend increase announcement can bring an appreciative upside to the stock price.
Here are four companies that should be increasing their dividends in the next month:
- Expected increase announcement: April 26.
- Current dividend: $2.60 (0.65/quarter); current yield: 1.60%.
- Increased dividend: 15 straight years.
- 1-year growth rate: 16.3%.
- 5-year growth rate: 26.2%.
- Payout ratio: 22%.
IBM has established itself as a strong dividend play, having increased its dividend for 15 straight years. The 1-year and 5-year growth rates are more than solid and the extraordinary low payout ratio of 22% suggests increasing dividends will be a breeze. IBM has consistently announced a dividend increase on the last Tuesday of April to the tune of 18%, 10%, 25%, 33% and a personal best 50% in 2006; this April 26 (the last Tuesday of April) look for a similar increase. A quarterly dividend bump to $0.70 or $0.75 is more than reasonable, given its strong ability to pay dividends and past history of increasing them. Look for a tidy 8% or 15% increase in your yield on cost if you buy before this late April announcement.
Johnson & Johnson (JNJ)
- Expected increase announcement: April 21.
- Current dividend: $2.16 (0.54/quarter); current yield: 3.65%.
- Increased dividend: 48 straight years.
- 1-year growth rate: 9.3%.
- 5-year growth rate: 10.6%.
- Payout ratio: 45%.
Johnson & Johnson has increased its dividend for 48 straight years, ranking it 13th among active dividend increase streaks. True, there’s uncertainty today about pharmaceuticals, but this has been a long-time favorite for income investors. For the past three years, investors have seen dividend increase announcements on the last or second to last Thursday of April. Past increases have been in the 6-10% range, and with JNJ paying out less than half its profits, expect this trend to continue. A modest increase to $0.58 a quarter, from $0.54, seems reasonable: a 7% increase in yield on cost.
- Expected increase announcement: May 3..
- Current dividend: $1.92 (0.48/quarter); current yield: 2.97%.
- Increased dividend: 38 straight years.
- 1-year growth rate: 6.3%.
- 5-year growth rate: 13.7%.
- Payout ratio: 49%.
Recently, Pepsi has been in the news for taking a back seat in sales to both Coca-Cola (KO) and Diet Coke. However, don’t let this trend fool you, as the whole soda market has steadily been decreasing. Pepsi has increased its dividend for 38 straight years and is well diversified in a plethora of other beverages and snacks. Paying about half of its profits, Pepsi is well-suited to keep growing in emerging markets. A dividend increase announcement has been made the last three years on the first Tuesday or Wednesday of May, with increases marking 7%, 6% and 13%. Even a three-cent increase on the quarterly dividend to $0.51 would allow for a 6% increase in your yield to cost.
Procter & Gamble (PG)
- Expected increase announcement: April 18.
- Current dividend: $1.9272 (0.4818/quarter); current yield: 3.17%.
- Increased dividend: 54 straight years.
- 1-year growth rate: 9.6%.
- 5-year growth rate: 11.6%.
- Payout ratio: 53%.
If you want to talk consistent dividend increases, talk PG. With 54 straight years of increasing dividends, it ranks sixth among active dividend increasers. The payout ratio and growth rate are reasonable and demonstrate a strong commitment to dividend growth. The dividend increase announcement has been somewhat sporadic over the last four years, coming on either the second Tuesday or the third Monday of April. Regardless, a dividend increase announcement around 10% looks promising. This would bump quarterly dividends up to much more, even $0.53, a 10% increase in yield on cost.
The expected increase announcements for the four companies listed above are simply that: Expected. However, each company has a strong track record of paying and increasing dividends. Further, the yearly increase announcement has been a relatively certain signal in recent years. Buying a stock before this increase announcement can add value in two ways:
- The increased dividend might not yet be factored in the stock’s price.
- It almost immediately increases your yield on cost.
What to look for to predict dividend announcements:
- A long history of paying dividends.
- Four quarters of the same dividend
- A pattern of increasing dividend at certain time. Use the company’s website and search for the dividend increase announcement in recent years to find a pattern.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.