With just 2 and a half weeks of trading left in 2011, this holiday season could be the perfect time to cheer up your portfolio. Then again, for the long-term dividend investor we don’t really care about the momentary dips, in fact we oft sit on the sidelines and root for them. The inverse relationship between yield and price is, in a word, attractive. Assuming one’s underlying investment thesis remains the same, a downward price movement provides ample room to swoop in and scoop up more shares with a higher yield.
But we can’t hope for price declines forever, after all no one ever got rich by buying high and selling low. Here’s where the 'secret sauce' of dividend investing comes into play: growing payouts. With 10-year treasurys hovering around 2% it’s not hard to find a higher yielding dividend stock. Heck, throw a dart at the S&P 500 and you have a pretty solid chance. But it’s not enough to find a heftier yield; we’re looking for fundamental companies that have the ability to not only pay dividends, but also increase them. (Ideally by a rate that far outpaces inflation.) Listed below are 4 companies that have proven to be both consistent and diligent in their dividend policy. Buy now and enjoy your next dividend increase before Valentine’s Day.
Let’s start with Warren Buffett favorite Coca-Cola (KO). This Atlanta-based beverage behemoth makes up over 20% of Berkshire Hathaway’s (BRK.A) portfolio and has increased in value 10 times over since Buffett starting purchasing in the early 1990s. Today the Oracle of Omaha can boast about a yield on cost of almost 29% to boot! While you aren’t going to grab that kind of yield and appreciation today, KO still reigns supreme on many income investor lists. Having not only paid but also increased its dividend payout for 49 straight years, KO is no stranger to creating shareholder happiness. With a current payout of $0.47 a quarter and a payout ratio around 35%, Coca-Cola would be able to increase its dividend by 10% a year for the next 11 years without having any growth in earnings; talk about sustainability!
But it's hard to imagine KO not selling more products next year, much less in 11 years. A more likely scenario is that the payout ratio remains about the same, while earnings and dividends grow lock-step. Our 10% yearly dividend growth rate isn’t even that far-fetched, as this is exactly what KO accomplished in the last decade, despite the ‘Great Recession.’ This would create a yield on cost of about 8%, not quite Buffett-esque, but still impressive. Look for Coca-Cola to announce its 50th straight dividend increase on the third Thursday of February as it has done over and over for at least the last 14 years. Even a modest increase can bump the current 2.8% yield over the 3% mark.
Despite its recent issues with taking over / not taking over T-Mobile, Dallas-based AT&T (T) has proven to be a healthy contender in the dividend arena. T sports a 5.9% current yield and has a history of increasing its payout for the last 27 years. True, the average dividend growth rate over the last decade has been lackluster, hovering in the mid single digits, but this telecom giant more than makes up for it with current yield. AT&T could look to make its next dividend increase announcement as soon as next week, where even modest growth would send your current yield over the 6% threshold. To put it into perspective, a 5% growth rate over the next 11 years leads to a yield on cost of about 10%, as compared to KO’s 8% YOC with double the dividend growth rate. It is important to consider both dividend growth and current yield. For those who are concerned that the T-Mobile deal will not go through, it might be wise to sit out the dividend increase announcement to wait and see. If the deal fails, it could offer a potential price drop with a corresponding opportunity to purchase a higher yield and more shares.
Keeping in mind reasonable yield and high dividend growth rates, let’s take a look at Houston-based ConocoPhillips (COP). This mega oil company (Although hardly the largest behind Exxon Mobil (XOM) and Chevron (CVX) has been pumping out dividend increases for 11 straight years at a 10-year average rate of about 12%. With a current yield around 3.7% and a payout ratio of 34%, COP could increase its dividend by about 12% a year for 10 years without having any earnings growth. This would result in a yield on cost above 11%, not to mention a happy investor. The new spin-off company “Phillips 66” provides an interesting twist to this scenario, as the current yield is expected to remain with COP while the new refining & marketing company will offer a “bonus” dividend. For a more complete look into this situation, see Tim McAleenan’s analysis here.
Further, COP has shown its commitment to shareholders in other ways as well, namely share buybacks. Since 2010, ConocoPhillips has repurchased about $15 billion worth of its stock, or about 15% of the company. A more recent announcement suggests that COP can repurchase an additional $10 billion in stock. Sure, a buy in the low $60s just a few months ago would have been sweeter, but COP looks poised to continue their streak of adding shareholder value.
Speaking of splits, let’s look at the 39 year streak of increased payouts provided by Illinois-based healthcare big Abbott Laboratories (ABT). As an income investor, I can’t think of anything that would put my sustainability worries more at ease than ABT’s recent headline: “Abbott Declares 352nd Consecutive Quarterly Dividend.” ABT also recently announced that it will be splitting into two companies, one focusing on diversified medical products and the other on research-based pharmaceuticals. Much like COP, the announcement focused on continuing the company’s history of strengthening shareholder value. Unlike COP, however, a “bonus” dividend does not appear to be in the works as each company is expected to “pay a dividend that, when combined, will equal the current dividend at the time of separation.” Still that’s not to say that the payout will be the same as it is today. The transaction looks to be completed late next year while ABT has consistently announced a dividend increase around Valentine’s Day. Over the past 10 years payouts have increased at an average yearly rate of around 9%. This suggests that by the time ABT splits in two, the current yield of 3.5% could turn into a yield on cost closer to 3.8%.