For me, it's fun talking about the long-term dividend growth rates of dividend growth stocks. For instance, did you know that both Johnson & Johnson (JNJ) and Becton Dickinson (BDX) have been growing dividends by over 10% annually for the past several decades? If you had bought a hundred shares of either firm twenty years ago or so and held on, you'd be sitting on a very nice income stream today. If you ever decided to sell that income stream, you'd be able to sell the underlying assets (i.e. the stock) for a very nice chunk of change.
But occasionally, I receive correspondence from readers who worry about two things that appear to be the stipulations of dividend growth investing: (A) You have to get the companies right, and (B) You have to be very patient, waiting for compounding to do its work.
The first part is certainly true. If you're going to hold onto a stock for twenty years, getting the company right is of vital importance. No one wants to see Eastman Kodak (EK), American Airlines (AAMRQ.PK), and Lehman Brothers "compounding" in his portfolio for an extended period of time. Of course, the benefit for many dividend growth investors in this regard is that the companies with staying power are often possible to predict. Twenty years ago, Coke (KO) was selling products everywhere. That will probably be true fifteen years from now as well. Procter & Gamble (PG) will probably still be selling Gillette razors years into the future, and store shelves will still be filled with Hershey's (HSY) chocolate bars decades down the line. And if you fill your portfolio with twenty or so of these types of companies with demonstrably and historically strong economic moats, you can afford to have a dud or two along the way, and still do quite fine.
And although investors need to be exceedingly patient (and even that might be an understatement) if they want to see a few hundred shares of Colgate-Palmolive (CL) turn into a small fortune, there is an element of instant gratification (believe it or not) inherent to the dividend growth investing strategy. And that would be (drum roll please): the announcement of the annual dividend increase.
Often, we'll speak in the abstract about how Coke has been raising its dividend annually for fifty straight years, and how beneficial this has been for investors. But if we step back from the big picture view and take a closer look at what is actually happening, we can see the incremental moments of "dividend growth satisfaction" that occur along the way.
Every February, the management team at Coca-Cola announces the dividend increase, almost like clockwork. As long as the debt remains at a reasonable level and people continue to drink Coke, Diet Coke, Fanta, Sprite, Vitamin Water, and Powerade, this will most likely continue. This past February was certainly no different.
"Coca-Cola Co. on Thursday raised its quarterly dividend 8.5%, to 51 cents from 47 cents per common share. The company said in a statement that it represents Coke's 50th consecutive annual dividend increase and is equivalent to an annual dividend of $2.04 per share, up from $1.88 per share in 2011. The first quarterly dividend is payable April 1, 2012, to shareowners of record as of March 15, 2012, the company said."
Let's say that someone has put aside $150 per month into Coke stock over the past nine years, diligently investing into the Atlanta-based beverage powerhouse for most of the past decade. He would now own around 250 shares of the company. Every year, that February announcement from Coca-Cola has a real impact on his life. In 2011, his 250 shares would have rewarded him with $470 in annual cash disbursements. Now, after the announcement, those same 250 shares will now give him $510 in annual cash disbursements. This is an immediate, measurable moment in dividend growth investing.
Every year for the past fifty years, Coke has awarded its investors with a dividend increase. And if you can eventually find fifteen or so companies like Coke to work into your portfolio, you can enjoy this "gratification" moment multiple times each year as your blue-chip holdings announce their annual dividend increase. For this article, I chose to stray from the typical conversation about what shares of Coke, Pepsi, or Johnson & Johnson might be worth ten years from now because I think it's nice to keep in mind that the road to wealth with dividend growth stocks gives you signals of progress every year along the way.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.