Dividend Growth 50: When Was The Last Time You Got An 8% Raise?

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Includes: AAPL, ADP, AFL, BAX, BDX, CAT, CL, CLX, COP, CVX, D, DE, EMR, GE, GIS, GPC, HCP, HSY, IBM, JNJ, KHC, KMB, KMI, KO, LMT, MCD, MKC, MMM, MO, MSFT, NEE, O, OHI, PEP, PG, PM, QCOM, QCP, SBUX, SHPG, SJM, SO, T, TGT, UTX, V, VZ, WBA, WEC, WFC, WMT, XOM
by: Mike Nadel

Summary

A quarterly review of the DG50 shows excellent year-over-year income growth.

Baxter, Visa and Lockheed Martin were some of the big gainers.

Income laggards included Kinder Morgan and HCP.

Altria and McDonald's are among the DG50 companies to have announced nice dividend hikes for the year ahead.

With market indices near all-time highs, are any good "deals" on DG50 stocks available now?

Bob Wells, my friend and fellow Seeking Alpha contributor, recently asked if I would start providing quarterly income reports on the Dividend Growth 50. Given that he was one of 10 panelists who teamed to create the portfolio three years ago, how could I turn him down?

His reasoning: The DG50 includes so many companies that are popular with so many users of this site - especially Dividend Growth Investing practitioners - that the information could inspire readers to research potential investments and, if desired or warranted, make adjustments to their own portfolio.

I'm glad Bob asked, because I love smiling... and tracking the DG50's progress often elicits an ear-to-ear grin. Such was the case again for this exercise, as income produced by the portfolio grew 8% from last year's total.


During all of my time as a working stiff, I never got an 8% annual raise... unless, of course, we count that time I embezzled $1 million.

Come on... I'm joking, folks!!! It was only $780,000!

But I digress...

It was almost exactly three years ago that Bob and nine other Seeking Alpha contributors responded to my request that they select 50 companies each as part of a collaborative project. I compiled the list and wrote a three-part series on what I called the New Nifty Fifty.

Two months later, on Dec. 16, 2014, I decided I liked the concept so much that I would pony up more than $25,000 of my own moolah to turn it into a real-time, real-money, buy-and-hold portfolio. I renamed it the Dividend Growth 50 - a more accurate and catchy moniker, if I do say so myself.

Without further ado, here is a look at the DG50's income growth in the July-September period compared to the third quarter of 2016:

COMPANY

Q3 2016 DIVIDENDS

Q3 2017 DIVIDENDS

INCREASE

Baxter (NYSE:BAX)

0.93

1.64

76.34%

Starbucks (NASDAQ:SBUX)

2.45

3.11

26.94%

Visa (NYSE:V)

1.13

1.34

18.58%

NextEra Energy (NYSE:NEE)

4.55

5.29

16.26%

Omega Healthcare (NYSE:OHI)

8.68

10.04

15.67%

Lockheed Martin (NYSE:LMT)

5.18

5.87

13.32%

Apple (NASDAQ:AAPL)

2.93

3.30

12.63%

Kraft Heinz (NASDAQ:KHC)

5.40

6.07

12.41%

Becton, Dickinson (NYSE:BDX)

2.71

3.04

12.18%

Dominion Resources (NYSE:D)

5.19

5.81

11.95%

Altria (NYSE:MO)

5.99

6.70

11.85%

Qualcomm (NASDAQ:QCOM)

3.90

4.35

11.54%

McCormick (NYSE:MKC)

3.10

3.45

11.29%

IBM (NYSE:IBM)

4.42

4.91

11.09%

Microsoft (NASDAQ:MSFT)

4.13

4.58

10.90%

Realty Income (NYSE:O)

7.08

7.80

10.17%

Automatic Data Proc.(NASDAQ:ADP)

3.28

3.61

10.06%

PepsiCo (NYSE:PEP)

3.93

4.32

9.92%

Coca-Cola (KO)

4.37

4.78

9.38%

McDonald's (NYSE:MCD)

4.67

5.08

8.78%

WEC Energy (NYSE:WEC)

5.70

6.20

8.77%

United Technologies (NYSE:UTX)

2.74

2.98

8.76%

Hershey (NYSE:HSY)

3.20

3.48

8.75%

Kimberly-Clark (NYSE:KMB)

3.82

4.15

8.64%

Walgreens Boots (NASDAQ:WBA)

2.69

2.92

8.55%

Southern (NYSE:SO)

6.01

6.52

8.49%

ConocoPhillips (NYSE:COP)

2.13

2.31

8.45%

3M (NYSE:MMM)

3.47

3.76

8.36%

Johnson & Johnson (NYSE:JNJ)

4.18

4.51

7.89%

Clorox (NYSE:CLX)

4.16

4.48

7.69%

Target (NYSE:TGT)

4.38

4.71

7.53%

General Electric (NYSE:GE)

4.84

5.20

7.44%

Aflac (NYSE:AFL)

3.41

3.66

7.33%

AT&T (NYSE:T)

7.81

8.36

7.04%

Verizon (NYSE:VZ)

6.66

7.12

6.91%

Exxon Mobil (NYSE:XOM)

4.74

5.05

6.54%

J.M. Smucker (NYSE:SJM)

3.87

4.12

6.46%

Procter & Gamble (NYSE:PG)

4.22

4.48

6.16%

Philip Morris (NYSE:PM)

6.57

6.98

5.94%

Wells Fargo (NYSE:WFC)

3.57

3.77

5.60%

Genuine Parts (NYSE:GPC)

3.40

3.59

5.59%

General Mills (NYSE:GIS)

5.03

5.29

5.17%

Chevron (NYSE:CVX)

5.73

6.02

5.06%

Colgate-Palmolive (NYSE:CL)

2.82

2.96

4.96%

Wal-Mart (NYSE:WMT)

3.13

3.28

4.79%

Caterpillar (NYSE:CAT)

4.08

4.27

4.66%

Emerson Electric (NYSE:EMR)

4.01

4.19

4.49%

Deere (NYSE:DE)

3.76

3.85

2.39%

Kinder Morgan (NYSE:KMI)

1.75

1.79

2.29%

HCP (NYSE:HCP)

6.96

4.71

(-32.33%)

Shire PLC (SHPG) NA NA NA
Quality Care Properties (QCP) NA NA NA

TOTALS

$212.86

$229.80

7.96%

Notes And Observations

SHPG did not pay a dividend this quarter; it normally pays a semiannual dividend during the 2nd and 4th quarters. QCP does not pay divvies at all. I know it seems weird that the DG50 now has 52 companies, but portfolio rules say not to sell newcomers that arrive in spin-offs or other corporate actions.

Baxter's huge income boost merits a bit of an asterisk. The company slashed its dividend after spinning off Baxalta (which later was acquired by Shire), so it had lowered the income bar for itself. James Saccaro, Baxter's chief financial officer, says the company plans "to maintain over the long term the targeted payout ratio of 35% of adjusted net income." So as long as income keeps rising for BAX, it also will rise for shareholders - which is as it should be.

Another company growing its dividend again after a deep cut is ConocoPhillips. In addition, Kinder Morgan's executives anticipate a return to DG next year - although I am a little skeptical given their past broken promises.

Chart BAX Dividend data by YCharts

HCP is the only DG50 company to cut its dividend in the last 12 months. While not as bad as the KMI and COP cuts were, it still hurts the portfolio's income stream to experience such a move from what had been one of its largest dividend payers.

Starbucks, Visa and NextEra Energy are three companies I bought fairly recently for my personal (non-DG50) portfolio. I purchased V and NEE just a couple of months ago, and I look forward to years of great dividend growth (and total return).

Chart
SBUX Dividend data by YCharts

Cyclical industrials Caterpillar, Emerson and Deere have been stuck in neutral, dividend-wise. Deere hasn't raised its payout since mid-2014. It nonetheless has had very nice price appreciation, as has CAT.

Popular consumer staples companies such as PG, SJM and GIS also have dramatically slowed their dividend growth as they work to keep themselves profitable within their industry's changing landscape.

Twenty-eight of the companies grew their income at a higher rate than the overall portfolio did, and 17 exceeded 10% growth.

The numbers in the table reflect the actual cash dividend paid by each company in each quarter. How is it possible that AT&T's income grew by 7% even though the company raised its dividend by only 2%? Credit the wonders of compounding! Because all dividends were reinvested (per portfolio rules), more shares of each company got purchased every quarter, and then those new shares also received divvies, which also got reinvested. Bing-bang-boom... that's the power of dividend growth!

Hut... Hut... HIKE!

A dozen DG50 companies paid increased dividends during the July-September quarter. In the table below, note how small the dividend increases were for consumer companies. That might be the new normal for the foreseeable future.

COMPANY RAISE AMT EX-DIV PAY
WBA 6.7% .40 8/16/17 9/12/17
HSY 6.1% .656 8/23/17 9/15/17
UTX 6.1% .70 8/16/17 9/10/17
KHC 4.2% .625 8/16/17 9/15/17
SJM 4.0% .78 8/9/17 9/1/17
CLX 3.9% .80 7/25/17 8/12/17
TGT 3.3% .62 8/14/17 9/10/17
WFC 2.6% .39 8/2/17 9/1/17
GIS 2.1% .49 7/6/17 8/1/17
OHI* 1.6% .64 7/28/17 8/15/17
CAT 1.3% .77 7/18/17 8/19/17
O** 0.2% .2115 6/29/17 7/14/17

* OHI had 4 dividend raises in the past year, with the total increase of 6.7%.

** O had 5 dividend raises in the past year, with the total increase of 5.0%; O pays its dividend monthly.

Seeing The Future

During the past three months, eight DG50 companies announced future dividend raises:

COMPANY RAISE AMT EX-DIV PAY
SHPG* 9.9% .1527 9/7/17 10/20/17
LMT 9.9% 2.00 11/30/17 12/29/17
MO 8.2% .66 9/14/17 10/10/17
MSFT 7.6% .42 11/15/17 12/14/17
MCD 7.4% 1.01 9/26/17 10/12/17
PM 2.9% 1.07 9/26/17 10/12/17
VZ 2.2% .59 10/9/17 11/1/17
O** 0.2% .212 9/29/17 10/13/17

* SHPG pays a semiannual dividend in uneven amounts; the raise mentioned was the increase from Q3 2016; total increase for the year was 14.9%.

** O had 5 dividend raises in the past year, with the total increase of 5.0%; O pays its dividend monthly.

Let's Go Shopping!

When I came up with the idea for the New Nifty Fifty three years ago, I had no intention of funding the DG50 - and I certainly did not aim to convince fellow investors to create a similar 50-stock portfolio. The idea was to present a variety of research candidates for potential investment.

With that in mind - and fully cognizant of the fact that market indices are near all-time highs in Year 9 of this bull market - let's check out the investment attractiveness of a few DG50 names...

Several companies that have encountered trouble and/or face headwinds seemingly offer good value now, including Qualcomm, General Mills, Target and Omega Healthcare. I keep thinking QCOM is due for a big rally, but instead, they get tagged with a new lawsuit every other week. Although GIS has a wonderful 119-year dividend streak and is nearing the 4% yield mark, I'm concerned about the steady decline of the prepared-foods industry.

I'm down on TGT because I think it is woefully behind its competition on many fronts. OHI faces headwinds in the skilled-nursing industry, but its high yield (currently 8%) is always a temptress. In my personal (non-DG50) portfolio, I'm not adding to any of these right now, except via dripping.

Chart
QCOM data by YCharts

Starbucks is rarely cheap, and it still is hardly a bargain. But at about 23 times next year's expected earnings, it seems a relatively good buy. SBUX is trading at about a 20% discount to Morningstar's $66 fair value estimate, and the company definitely is committed to growing its dividend.

After a big run-up, Apple has pulled back a little lately, and it's trading at about 14 times next year's anticipated earnings. I'd like it better at $140-ish - but who wouldn't?

Pepsi's "Crosetti Number" (5-year average dividend yield) of 2.8% suggests the company is fairly valued or even slightly undervalued. In the graphic below, we can see that Pepsi's yield line just crossed back over its price line - a valuation metric that DG50 panelist David Crosetti calls the Dividend Yield Point.

Chart PEP data by YCharts

I have a limit order for PEP in place at $107.33 (the 3% yield mark) within my personal portfolio, but I might be willing to go a little higher. The company reports earnings on Wednesday, Oct. 4.

Cases certainly could be made for buying other DG50 components (and, for that matter, stocks not in the portfolio), and I'm sure some of those will be discussed in the comment stream.

Conclusion

These quarterly updates will be all about income. After all, it is the Dividend Growth 50, not the Total Return 50.

That doesn't mean I am ignoring total return. My next report about the DG50's overall performance will be published shortly after the project celebrates its third birthday in mid-December. Even many investors who use DGI as their primary strategy want to see the dollar value of their portfolios keep growing and growing.

Eric Landis, another panelist who helped select the DG50's components, maintains a section on his DGI For The DIY blog dedicated to the project. It features a detailed history, as well as links to the many related articles that have appeared on Seeking Alpha. I thank Eric for his efforts, and I am happy these quarterly income reports also will find a home there.

Disclosure: I am/we are long ALL COMPANIES LISTED.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.