You don't have to have been an investor for long to understand that there are no guarantees in the financial markets. However, when companies have consecutively raised dividends for 55, 50, and 35 years, you can be nearly certain that they will do so again. This method of investing in companies that continually raise dividends is a powerful method of compounding returns over time, making the dividend picks below safe and consistent means of building wealth.
Emerson Electric (EMR) Emerson Electric, which is a highly diversified electronics company that provides the equipment necessary to make major infrastructure and industrial facilities operate efficiently. Among dividend investors, the company is well-known for its dedication to increasing its annual dividend, which it has done for 55 consecutive years. Most recently, EMR raised its dividend 16% to $1.60 annually. At the current share price of $51.52, the dividend yields 3.2% for investors. EMR is a favorite of major dividend appreciation mutual funds, with Vanguard and T. Rowe Price holding significant ownership stakes in the company.
Emerson is a well-run company with a solid financial footing. Although the company is highly leveraged, with $6 billion of debt, the company generates free cash flow impressively, at over $2 billion annually. EMR trades at a price-earnings ratio of 15, which is in line with its history. It has grown revenues impressively, with 15% growth from FY 2010 to FY 2011. Due to the relatively stagnant economy, analysts expect flat revenues and profits for FY 2012, which have kept shares in a relatively tight trading range during 2012. FY 2013 should see modest growth in revenue and profit, which will provide support for a greater dividend increase in the future.
Coca-Cola (KO): Coca-Cola is the world leader in soft drinks, with revenue of $46 billion in 2011. Coca-Cola was rated Interbrands tabs Coca-Cola as the world's leading brand in 2011. The strength of Coca-Cola's brand is global in nature, with Coca-Cola now available in over 200 countries.
Coca-Cola also has a rich tradition of dividend increases, with annual increases dating back to 1963. 2012 marks the 50th consecutive year of dividend increases for the company. In February, KO declared a dividend increase of 8% to $1.02 (it was $2.04 divided in half due to the recent 2-for-1 share split). KO has been tremendously consistent in terms of dividend increases, with typical increases of 7-10%. That regularity makes it particularly attractive to long-term income investors. At the present price of $39.35, KO yields 1.3%. Although the yield has reduced due to optimism on the part of investors for earnings growth, if the company executes its growth strategy and increases dividends in the future, investors will see their effective yield increase significantly over time.
Coca-Cola appears fairly valued for investors. While the robust scale economies that Coca-Cola gains through selling syrup concentrates has allowed Coca-Cola to generate operating margins of 23% and free cash flows of $7 billion annually, the company sports a price-trailing earnings ratio of just over 20, and a price-earnings-growth ratio of 2.6. The company had a tremendous Q2 2012 which handily beat analyst expectations. From a future dividend safety standpoint, the world's leading brand has a competitive advantage that has contributed to the decision of Warren Buffet to make Coca-Cola a core holding of his Berkshire Hathaway.
McDonald's (MCD) McDonald's is a global leader in quick service restaurants, with over 35,000 restaurants in 119 countries worldwide. The recent turmoil in Europe has certainly caused McDonald's stock to fall over the past few months from 102 in March to 88 today. The fundamentals suggest that McDonald's is fairly valued at present levels, however. McDonald's currently trades at 16 times earnings, which is in line with their current growth rate.
Having largely exhausted new market opportunities in the United States, global brand equity holds key to McDonald's continuing their impressive growth. Capitalizing on global growth has supercharged McDonald's earnings and share price since the lows of January 2003. McDonald's has grown in terms of revenue from $17 billion in 2003 to $27 billion in 2011 and earnings have grown fourfold from $1.14 to $5.35 per share. Investors have been richly rewarded with share price gains from $13 to $88 over the 2003-2011 period.
During that same period, McDonald's has also richly rewarded income investors with tremendous gains in dividend payouts. The company, which until 2007 paid an annual dividend before changing to quarterly dividends in 2008, increased the annual dividend from $.40 in 2003 to $2.80, an increase of 600%. At the current share price of $88, the dividend yields 3.2% for investors. The most recent dividend increase, announced in September of 2011, was an impressive 12%. The company, which has increased dividends every year since 1977, is due for another dividend increase, which are typically announced during the month of September. The increase is so pronounced that investors that purchased shares in 2003 for $14 and held until 2012 are now receiving an annual effective yield of 20%, not including dividend reinvestments. That is an excellent example of the benefits of long run investing in companies with histories of dividend increases.
McDonald's ability to significantly raise dividends in the future will come primarily from international operations. McDonald's has relied and will continue to rely on international expansion to generate growth, which is illustrated by the share of total revenue accounted for by geographical regions. During FY 2011 McDonald's generated 32% of sales from the United States, which was eclipsed by the 40% generated in Europe. Asia/Africa/Middle East, a region that is a tremendous growth driver for the company, generated 22% and other countries accounted for 6%. The difference in growth rates between the United States and the rest of the world for McDonald's are staggering. In FY 2009-2010 and FY 2010-2011 McDonald's saw double-digit increases for global markets (excepting Europe) and just 2% and 5% growth in the United States.