Dividend Growth 50: This 8.18% Raise Is A Great Birthday Gift

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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, VDIGX, VIG, VOO, VZ, WBA, WEC, WFC, WMT, XOM
by: Mike Nadel

Summary

In its third year of existence, the DG50 saw income increase by more than 8%.

Starbucks, Baxter and Visa were some of the best income-growing positions.

Income growth slowed for popular DGI names such as General Mills, Target and Emerson Electric.

The DG50 grew income better than several benchmarks, but mutual fund VDIGX continued to perform well.

It's a happy 3rd birthday for the Dividend Growth 50, as robust income acceleration returned to the project.

I'll take an 8.18% raise any year for the rest of my life, be it in a job or in the income stream of my portfolio, thank you!

Two of the previous year's laggards, Baxter (BAX) and ConocoPhillips (COP), delivered dividend increases. And infamous income slasher Kinder Morgan (KMI) maintained its payout rate (with promises of aggressive hikes to come).

Throw in typically outstanding income boosts from Dividend Growth Investing stalwarts such as Lockheed Martin (LMT), Dominion Energy (D), McCormick (MKC) and Realty Income (O), and I wasn't overly surprised to see the DG50 far exceed its disappointing 4.63% income growth of 2016.

In my previous article, the annual Dividend Growth 50 total-return report, I showed that although the portfolio experienced its best year-over-year gain ever (15.3%), it had been outperformed by the overall market. Not exactly a stunner, given a raging bull market favoring techs and other growth companies over the "boring" stocks that populate the DG50.

This article will deal almost entirely with income - which is what the DG50 is mostly about, anyway.

It was nice to see the Dividend Growth 50 go back to increasing its income more than the Vanguard S&P 500 ETF (VOO). The DG50 also beat Vanguard Dividend Appreciation ETF (VIG) in that category. Meanwhile, Vanguard Dividend Growth Fund (VDIGX) continued its impressive showing.

ENTITY

SHARES 12/31/16

DIV PD 2016

SHARES 12/31/17

DIV PD 2017

INCOME GROWTH

VOO

3.147

$12.85

3.207

$13.84

7.70%

VIG

6.313

$11.37

6.441

$12.21

7.39%

VDIGX

244.035

$107.53

256.994

$125.51

16.72%

DG50

$844.05

$913.11

8.18%

Quick recap: Originally dubbed the New Nifty Fifty, this group of stocks was selected in 2014 by 10 Seeking Alpha contributors. That December, I invested $25,000 of my own money in the portfolio, renamed it the DG50, and also bought shares of VIG, VOO and VDIGX so I could do apples-to-apples comparisons.

This is a multiple-year project designed to help better understand the strengths and weaknesses of both buy-and-hold and DGI strategies. It never has been a recommendation for fellow investors to replicate this portfolio.

Here is a company-by-company look at the Dividend Growth 50's income growth, listed in order of performance:

COMPANY

SHARES 12/31/16

DIV PD 2016

SHARES 12/31/17

DIV PD 2017

INCOME GROWTH

MR DIV INC%

Shire ** (NASDAQ: SHPG)

1.044

$0.14

1.050

$0.96

585.71%

14.93%

Starbucks (NASDAQ: SBUX)

12.336

$10.39

12.562

$13.04

25.51%

20.00%

Baxter #

10.220

$4.87

10.330

$5.95

22.18%

23.08%

Visa (NYSE: V)

8.119

$4.73

8.175

$5.61

18.60%

18.18%

Omega Healthcare (NYSE: OHI)

14.865

$33.83

16.163

$39.44

16.58%

6.56%*

NextEra Energy (NYSE: NEE)

5.311

$18.15

5.459

$21.10

16.25%

12.93%

Lockheed Martin

3.182

$21.17

3.263

$23.98

13.27%

9.89%

Dominion Energy

7.550

$20.66

7.842

$23.25

12.54%

10.05%

Apple (NASDAQ: AAPL)

5.198

$11.43

5.280

$12.86

12.51%

10.53%

Qualcomm (NASDAQ: QCOM)

7.483

$15.17

7.777

$17.01

12.13%

7.55%

Altria (NYSE: MO)

10.802

$24.34

11.198

$27.25

11.96%

8.20%

McCormick

7.273

$12.37

7.418

$13.78

11.40%

20.64%

IBM (NYSE: IBM)

3.213

$17.29

3.336

$19.23

11.22%

7.14%

Microsoft (NASDAQ: MSFT)

11.614

$16.80

11.866

$18.63

10.89%

7.69%

J.M. Smucker (NYSE: SJM)

5.224

$14.63

5.357

$16.13

10.25%

4.00%

Becton Dickinson (NYSE: BDX)

4.136

$11.10

4.198

$12.23

10.18%

2.74%

Realty Income

11.994

$28.09

12.531

$30.93

10.11%

5.20%*

Automatic Data Processing (NASDAQ: ADP)

6.257

$13.08

6.395

$14.40

10.09%

10.53%

PepsiCo (NYSE: PEP)

5.257

$15.04

5.406

$16.55

10.04%

6.98%

Coca-Cola (NYSE: KO)

12.798

$17.56

13.228

$19.20

9.34%

5.71%

McDonald's (NYSE: MCD)

5.331

$18.88

5.468

$20.63

9.27%

7.45%

Target (NYSE: TGT)

7.428

$16.89

7.750

$18.43

9.12%

3.33%

WEC Energy (NYSE: WEC)

11.715

$22.72

12.100

$24.68

8.63%

6.25%

Hershey (NYSE: HSY)

5.250

$12.41

5.372

$13.48

8.62%

6.15%

3M (NYSE: MMM)

3.161

$13.82

3.233

$14.99

8.47%

5.86%

ConocoPhillips

8.632

$8.51

8.832

$9.23

8.46%

6.00%

Southern (NYSE: SO)

10.990

$23.74

11.504

$25.71

8.30%

3.57%

Johnson & Johnson (NYSE: JNJ)

5.296

$16.40

5.430

$17.76

8.29%

5.00%

Kimberly-Clark (NYSE: KMB)

4.214

$15.08

4.347

$16.33

8.29%

5.43%

Walgreens Boots (NASDAQ: WBA)

7.243

$10.51

7.387

$11.31

7.61%

6.67%

General Electric (GE)

21.343

$19.27

22.107

$20.73

7.58%

(50.00%)

General Mills (NYSE: GIS)

10.623

$19.41

10.994

$20.87

7.52%

2.08%

AFLAC (NYSE: AFL)

8.406

$13.75

8.595

$14.76

7.35%

4.65%

AT&T (NYSE: T)

16.660

$31.02

17.524

$33.24

7.16%

2.04%

Kraft Heinz (NASDAQ: KHC)

9.591

$22.15

9.868

$23.73

7.13%

4.17%

Clorox (NYSE: CLX)

5.262

$16.27

5.396

$17.43

7.13%

5.00%

Verizon (NYSE: VZ)

12.045

$26.62

12.638

$28.49

7.04%

2.16%

United Technologies (NYSE: UTX)

4.204

$10.84

4.304

$11.54

6.56%

6.06%

Genuine Parts (NYSE: GPC)

5.244

$13.35

5.395

$14.22

6.52%

2.66%

Philip Morris (NYSE: PM)

6.574

$26.26

6.832

$27.97

6.51%

2.88%

Exxon Mobil (NYSE: XOM)

6.435

$18.78

6.682

$19.98

6.39%

2.67%

Procter & Gamble (NYSE: PG)

6.403

$16.77

6.603

$17.74

5.78%

3.00%

Wal-Mart (NYSE: WMT)

6.303

$12.33

6.478

$12.93

4.87%

2.00%

Colgate-Palmolive (NYSE: CL)

7.314

$11.19

7.478

$11.73

4.83%

2.56%

Chevron (NYSE: CVX)

5.465

$22.86

5.680

$23.96

4.82%

0.00%

Wells Fargo (NYSE: WFC)

9.527

$14.17

9.799

$14.83

4.66%

2.63%

Emerson Electric (NYSE: EMR)

8.590

$16.01

8.864

$16.74

4.56%

1.04%

Caterpillar (NYSE: CAT)

5.396

$16.23

5.548

$16.91

4.19%

1.30%

Kinder Morgan (KMI)

14.144

$6.96

14.505

$7.14

2.59%

0.00%

Deere (NYSE: DE)

6.355

$14.98

6.483

$15.36

2.54%

0.00%

HCP (HCP)

12.430

$25.03

13.057

$18.73

(25.17%)

0.00%

Quality Care Properties ** (NYSE: QCP)

2.000

NA

2.00

NA

NA

NA

TOTAL

$844.05

$913.11

8.18%

TABLE NOTES:

MR DIV INC% (the last column) is Most Recent Dividend Increase Percentage. Numbers represent the most recently announced increase by each company. While most figures show raises made in 2017, a few are for payouts that don't begin until the first quarter of 2018.

# - Baxter's 2016 dividend included two small payments made by its spin-off, Baxalta.

* - Omega Healthcare and Realty Income each had multiple dividend increases in 2017. The MR DIV INC% column reflects each company's total of announced increases during the year.

** - Quality Care Properties and Shire were new to the DG50 in 2016; QCP was spun off from HCP, and SHPG bought Baxalta. The portfolio now has 52 companies. SHPG made only one dividend payment in 2016 after it entered the DG50, which helps account for its triple-figure income increase in 2017.

Important: Income Growth vs. Dividend Growth

As always, all dividends were reinvested into the same stocks - a process commonly called "dripping." This makes income growth for this portfolio different from the general concept of dividend growth.

Moreover, it demonstrates the powerful effect of compounding.

For example, the DG50 held 16.660 shares of AT&T on Dec. 31, 2016; a year later, the share total was 17.524 due to dividend reinvestment. So even though T raised its payment to shareholders by only 2%, the combination of dripping and the divvy hike increased the actual cash T paid into the portfolio's income stream by 7.16% year-over-year. Boom!

Facts And Observations

Nineteen positions experienced an income growth percentage higher than the year before, while 32 saw less such growth.

Although that supports a general trend of slowing dividend growth among stocks popular with DGI practitioners, most of the differences in the DG50 were immaterial. For example, the NEE position's income grew "only" 16.25% this year after increasing by 16.5% in 2016.

Two of last year's biggest income-growing positions were Kraft Heinz and WEC Energy, largely because merger and acquisition activity led to additional shares of each entering the portfolio. They had no such benefit this time, and therefore experienced more pedestrian growth.

Among companies not involved in heavy M&A activity, Starbucks was the DG50's income growth champion for the second consecutive year - with yet another 25%-plus increase. Now that it is a more mature company, SBUX has become a DGI Machine. It's even yielding more than 2% for the first time ever.

Chart SBUX Dividend data by YCharts

The biggest turnaround was from the Baxter position, which experienced 22% income growth in 2017 after an M&A-related decline of more than 60% the year before. ConocoPhillips, whose massive dividend cut led to the position's 64% income reduction in 2016, experienced 8% growth this time.

A year after its promise-breaking 75.5% dividend cut, KMI held its divvy steady throughout 2017; that let its DG50 position grow income by nearly 3%. Kinder Morgan executives are again vowing to make double-digit divvy hikes, so we'll see what '18 brings.

Among companies that hadn't cut the year before, the McCormick position made a nice upward move from 9.61% income growth in 2016 to 11.40% in '17.

HCP was the only position to sustain an income loss - down 25.17% after having cut its dividend in 2016. The healthcare REIT also is the only DG50 holding to suffer a total-return loss in each of the DG50's three years of existence. Talk about a loser!

Chart HCP data by YCharts

Looking toward 2018, many pundits are predicting plenty of dividend hikes in response to significant corporate tax cuts.

Nevertheless, a handful of Dividend Growth 50 companies seem a bit stingy with future Divvy Dollars. I'm looking at you, AFL, GIS, SJM, TGT, BDX and EMR.

And GE continues to be a DGI practitioner's nightmare, having already announced a 50% dividend cut for 2018 - its second major hatchet job in less than a decade. That's no way to bring good things to light!

In addition to some already mentioned, there will be numerous other interesting income-related DG50 stories to watch in 2018, including:

  • Chevron ... With oil prices rising, is it time to give shareholders some more love?
  • Wells Fargo ... The tax law should be a boon for banks, so will WFC reward investors - if nothing else as a show of good faith after years of corporate shenanigans?
  • Coca-Cola ... Will several years of uninspiring earnings, revenue and free cash flow finally impact the dividend negatively?
  • Dominion ... Will the just-announced merger with Scana (SCG) be good or bad for the company, both short-term and long-term? And will it be good or bad for a dividend policy that has been quite aggressive for a utility?
  • PG, CL, SJM, GIS, KHC, PM, WMT ... Can these consumer staples companies get back to seriously growing their payouts?
  • Qualcomm ... Will it be taken over by Broadcom (AVGO) in 2018? If so, how will that affect dividend investors?
  • Deere ... Now that it has experienced two very strong years, will it dig up a divvy hike for first time since the summer of 2014?

Conclusion

So, what have we learned from this project through three years?

First and foremost, the panelists did a pretty darn good job of picking the DG50's components; with very few exceptions, these companies are doing their jobs.

One thing I have learned is to keep an open mind. For example, although I still strongly believe in building a portfolio of blue-chip, dividend-growth stocks, I have taken note of the performance of VDIGX, the Vanguard mutual fund.

I opened a separate position in my Individual 401(k) plan before VDIGX closed to new investors, and I have been adding money periodically. Hopefully, it will start accepting new accounts again for those interested.

VIG has been less impressive, but there certainly are some dividend-based ETFs worth considering. My Seeking Alpha colleague (and DG50 panelist) Dave Van Knapp has written several articles on the subject.

All in all, I remain encouraged about the DG50 project. It's been a great educational tool so far ... and, as a bonus, it has added to both my future income stream and my overall portfolio value.

For a three-year-old kid, the Dividend Growth 50 has behaved very well!

Disclosure: I am/we are long ALL DG50 COMPANITES MENTIONED.

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.