For the very long-term investor, a stock's ex-dividend date is effectively inconsequential. Surely the buy-and-holder will receive his or her fair share of dividend payments over the course of a lengthy holding period. In this way, appropriateness and overall value is much more important than whether or not the investor catches the latest payout.
I recognize that this article is titled much in the same way as other actionable articles, such that there is a beckoning "buy now" bias. Likewise, the underlying information remains practically the same. However, I would like to precursor the article by suggesting that price paid and the fundamental soundness of a company is much more important than receiving an extra dividend payment. With that being said, for those looking to initiate new capital, it can be disheartening to complete one's due diligence only to realize that you missed the most recent dividend by a day or two.
This article details five stocks that should be very well known to any reasonably versed dividend growth investor. Each has increased its dividend for at least 35 straight years and is going Ex-Dividend in the coming weeks. A much more complete list of companies that have substantial records of dividend increases can be found using David Fish's wonderful Dividend Champion, Contender and Challenger list.
Johnson & Johnson (NYSE:JNJ) - This New Jersey-based Healthcare Conglomerate operates in the Consumer, Pharmaceutical and Medical Devices segments. For 49 straight years Johnson & Johnson has not only paid a dividend but also increased it. If you want to talk about a wide and tangible moat, one need not look any further than their antiseptic mouthwash: Listerine. People buy the stuff in droves, and likewise ignore the literally half-priced generic that Wal-Mart (NYSE:WMT) pumps out. If you ask me, there's simply not much of a difference. But luckily for JNJ, most consumers don't ask me. Neither for mt opinion on the similarities between Listerine and the generic, nor for their other moat products such as: Band-Aid, Clean & Clear, Neosporin, Reach, Tylenol or Sudafed. For JNJ this spells profit, and lots of it.
Johnson & Johnson goes ex-dividend this Friday, February 24, for its fourth $0.57 a quarter dividend which is payable on March 13th. This represents a 3.5% current yield on one of the steadiest of eddies in the dividend game. Over the past decade JNJ has grown dividends at a rate faster than 12% a year. True, JNJ has slowed the pace a bit recently, but still averages around 9% dividend growth over the last 5 years. Even if JNJ only grows its dividend by around 7% a year for the next decade, that still represents a doubling of the dividend, for a yield on cost around 7%. Sure looks like a winner net of inflation to me.
The current price-to-earnings multiple appears a bit high, but this is mostly due to a variety of short-term issues. As I detail here, this could be an opportune time to buy JNJ at PE and dividend levels comparable to or better than when Warren Buffett made purchases. JNJ looks to become the 13th member of the half a century of consecutive dividend increases club with an announcement this April.
McDonald's (NYSE:MCD) - I know what you're going to say already, MCD is too expensive. With a PE ratio around 19 and a price hovering around its all-time high of $100, I would agree that there isn't much room for safety. Then again, for the super long term it's never a bad time to own a wonderful company. 22 brokers still like a collective 1-year target upside of almost 8%. McDonald's has been rewarding shareholders for 35 straight years now, with dividend increases in the last decade being especially spectacular. Over the last decade MCD has increased its dividend by over 25% a year, whilst the 5-year rate stands at an impressive 20% average yearly clip.
Whether or not McDonald's can sustain this incredible rate of dividend increases remains to be seen, but dividend investors have to like the MCD business model. McDonald's is essentially a landlord with the rights to sell the most recognizable hamburger on the side. The higher margin renting allows the MCD Corporation to sit back a bit and let the franchisee profits roll in; much in the same manner that a dividend growth investor operates. In 2002 MCD had an initial yield of just 0.89%. Fast forward to 2011 and that's a yield on cost of 9.56%. Even if McDonald's can do half as well in the next decade that represents a yield on cost over 8% versus today's 2.8% current mark. McDonald's goes Ex-dividend on February 28th with its second $0.70 quarterly dividend to be payable on March 15th.
PepsiCo (NYSE:PEP) - PepsiCo is becoming more and more a snack monopoly than it is a beverage provider, taking a back seat to both Coca-Cola (KO) and Diet Coke. However, PepsiCo does have more billion-dollar brands than Coca-Cola. Recently PEP has been taking heat for job layoffs and structural issues, causing the stock price to slide. Surely the short-term concerns are founded; however, I don't think the long-term investor has much to worry about here. If you had a crystal ball into the future, I would bet that you would still see PepsiCo beverages making billions of dollars by playing second fiddle to KO. Not to mention its overwhelming control of the salty snack business via well-known brands such as Doritos, Ruffles, Tostitos, Cheetos, Lay's and Fritos.
PepsiCo has essentially the same narrative as JNJ when it comes to the past decade of dividend history. Over the last 10-year stretch PEP has grown payouts by an average of about 13% a year. Payment increases have slowed a touch as of late, but that's certainly not the same thing as halting. PepsiCo has increased its dividend for 39 straight years and looks to make it an even 40 this May. Using PEP's 3.3% current yield and a conservative 7% dividend growth rate moving forward, that equates to a 6.5% yield on cost in the next decade. PepsiCo goes ex-dividend on February 29th with its fourth payable $0.515 quarterly dividend hitting investor's pockets on March 30th.
Becton, Dickinson and Company (NYSE:BDX) - I'm just going to go ahead and say it, for most, Becton Dickinson isn't as iconic as JNJ, PEP or MCD. But that doesn't prevent this New Jersey-based healthcare Company from consistently rewarding shareholders. BDX focuses on Medical devices, Diagnostics and Biosciences; without much on the ad-friendly consumer side. Becton has been able to not only pay but also increase its dividend for the last 40 years. Recently this has come in the form of near 16% average growth over the last decade and almost 14% average growth over the last 5 years.
Interestingly, BDX quotes the average 5-year dividend growth rate and the 5-year annual revenue growth rate at: 13.78% and 6.41% respectively. To some this might suggest a problem with future sustainability. True, unless costs are magnificently reduced in the future, eventually this type of model will catch up to the payouts. However, BDX currently pays out just 32% of its profits, so the concern appears to be mitigated at least for a while. Meanwhile, dividend investors are rewarded with effective payout ratio increases.
A more applicable issue likely comes from Becton Dickinson's 2.3% current yield. Assuredly much too low for a variety income investors, some might bypass BDX for this reason alone. But it should be noted that a 10% average dividend growth rate over the next decade results in a 6% yield on cost. There is an inherent need to consider both current yield and achievable dividend growth in the future. This is oft a personalized decision based on income wants and future prospects; however I would suggest BDX is at least worth a second look. Fellow Seeking Alpha contributor Tim McAleenan seems to think so as well, as he detailed BDX as one of two dividend aristocrats you can buy today. BDX goes ex-dividend on March 7, with its second installment $0.45 dividend to be payable on March 30th.
Coca-Cola (NYSE:KO) - Speaking of what is and what isn't iconic, Atlanta-based Coca-Cola is perhaps the most outstanding of iconic brands. Beyond the Coca-Cola brand, KO is probably most recognizable in the investing community as Warren Buffett's largest holding. But it should be noted that Warren hasn't committed capital to KO since the early 1990's. Still, Coca-Cola remains the world's most valuable brand. It isn't necessarily difficult to determine the reason either. Simply go to your local grocery, sit by the soft drink aisle, and watch as consumers time and again innocuously grab those Coca-Cola 2-liters without regard for how cheap a generic taste alike might be.
To the delight of dividend growth investors everywhere, KO opened a bit of happiness with its announcement of its 50th consecutive annual dividend increase last Thursday. The increase came in the increment of 4 cents a quarter, moving from 2011's $0.47 a quarter to 2012's $0.51. This represents an 8.5% increase in payouts and more importantly emphasizes the ideology of dividend growth investing quite well. As long as KO keeps increasing its dividend well above inflation, my purchasing power keeps increasing and my satisfaction keeps growing. In this way, I don't really care what happens to the price of Coca-Cola unless it goes down - so that I can buy more.
Over the last decade KO has increased its dividend by an average growth rate of about 10%. With a current yield around 2.95% and an average dividend growth in the high single digits, this represents a yield on cost around 6% in the next decade. KO goes ex-dividend on March 13th, with a $0.51 payable dividend on April 1st.
Buy into any these companies before Spring Break and enjoy a nice little payout upon your return. More importantly, a buy today represents an ownership stake in a wonderful company that will continuously work to return your payout. Here's to Spring Break 2012!
Disclosure: I am long JNJ, PEP, KO.