Dividend Growth 50: Double-Digit Divvy Dollar Dandy!

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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, 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 big-time income growth.

Major improvement from the likes of Kinder Morgan, Deere, and Caterpillar lead the way.

Most DG50 components experience double-digit, year-over-year income growth.

Backsliding, dividend-cutting General Electric is doing the DG50 no favors.

I'm not the kind of guy who tends to throw around exclamation points willy-nilly, but... Wow! What a quarter of increasing income for the Dividend Growth 50!

Thanks to solid earnings and rising free cash flow in most industries, shareholders have been rewarded with sizable dividend hikes. Given the quality of the businesses that populate the DG50, it should be little surprise that the third quarter of 2018 resulted in the real-money, real-time portfolio's best year-over-year income growth yet.

Spurred by generous raises from former dividend laggards such as Kinder Morgan (KMI), Deere (DE), Wells Fargo (WFC), and Caterpillar (CAT), the DG50 saw its income grow nearly 11% from the third quarter of 2017 to Q3 2018.

That's about 3 percentage points higher than the income growth from Q3 2016 to Q3 2017. Fueling the rise: More than half of the portfolio's companies experienced acceleration by double-digit percentages.

I will present a table with all of the results and make some observations about the quarter shortly, but first...

A Quick DG50 Primer

In the fall of 2014, I asked 10 fellow Seeking Alpha contributors, most of whom practiced some form of DGI, to choose 50 companies each. The compilation was called the New Nifty Fifty.

Two months later, I put $25,000 of my own money into an equally weighted portfolio of the stocks and dubbed the project the Dividend Growth 50. I since have written dozens of articles about it; panelist Eric Landis has chronicled its history in his blog, DGI For The DIY.

Our friend (and DG50 panelist) Bob Wells asked me to start doing quarterly income reviews in addition to my customary year-end looks at total return. I felt his request made sense because this portfolio includes so many companies that are popular with DGI practitioners and other Seeking Alpha readers.

Perhaps this article (and comment stream) will give investors ideas for companies to research, as well as insight into concepts that many might find appealing.

REMEMBER: My Dividend Growth 50 work is never a recommendation that other investors re-create the portfolio. That's my own little insanity!

Without further ado, here is a look at the DG50's income growth in the July-September period of 2018. (For comparison's sake, the last column shows the growth from Q3 2016 to Q3 2017.)

IMPORTANT: The table reflects the actual cash dividend paid by each company in each quarter; the data was lifted directly from the brokerage statements. Income growth for each position - as shown in the green-tinted INCREASE column - usually is much higher than each company's dividend raise.

Let's use Caterpillar as an example, as CAT's income grew by nearly 13% even though the company raised its dividend by about 10%. Credit the wonders of compounding. Because all dividends were reinvested (per portfolio rules), additional shares were purchased every quarter, and then those new shares also received Divvy Dollars, which also got reinvested.

There were 5.517 shares of CAT in the DG50 at the end of Q3 2017. Over the next 12 months, .122 shares were added thanks to "dripping." So by Q3 2018, the DG50 benefited not only from CAT's 10.26% dividend increase but also from the higher share total. That resulted in the position's dividend increasing from $4.27 to $4.82 year-over-year - a 12.88% income gain.

Notes and Observations

  • In the main DG50 table, I put a small break between the companies that grew income by double-digit percentages and those that didn't. Had the increases of ConocoPhillips (COP), Microsoft (MSFT), Johnson & Johnson (JNJ), Genuine Parts (GPC), and WEC Energy (WEC) been rounded up to 10%, that would have made for 31 members of the 10% club.
  • Shire (SHPG) did not issue a dividend this past quarter; it makes semiannual payouts during the 2nd and 4th quarters. Shire is the 51st company in the DG50, having arrived two years ago through corporate action involving a Baxter (BAX) spin-off.
  • The portfolio actually had a 52nd component for a little while, but Quality Care Properties merged a few months back with a different company. The DG50 received $41.50 in cash and got to bid adieu to an underperforming, non-dividend-paying company, so it's all good.
  • I included the "2016-17" column in the table so fellow investors could better judge the relatively outstanding income growth that took place in Q3 2018. Aside from KMI - which I had highlighted in my previous update (HERE) - there were plenty of other companies that paid significantly higher dividends into the DG50 this year.
  • Deere (which had frozen its dividend for most of four years) and fellow industrial equipment maker Caterpillar (which had seen its dividend barely budge over three years) are finally moving back in the right direction. Wells Fargo, the financial conglomerate that is trying to recover from several scandals, also beefed up its dividend as a sign of goodwill toward shareholders.

Chart

DE Dividend data by YCharts

  • Twenty-two of the 26 double-digit growers in Q3 2018 outpaced their rises of a year earlier, and NextEra (NEE) matched its nice 16.26% increase. Eleven other DG50 companies also showed better growth.
  • HCP (HCP) saw income move nearly 6% higher a year after the health-care REIT's large dividend cut had resulted in a 32% reduction. HCP's dividend, which fell from 58 cents per share in Q3 2016 to 37 cents in Q3 2017, remained at 37 cents in Q3 2018 (see Fidelity graphic below). Compounding through dripping helped HCP's income grow year-over-year.

  • Some fine companies, including Walmart (WMT) and Becton, Dickinson and Company (BDX), had only token dividend hikes and, therefore, gave the DG50 relatively small income increases. They chose to improve their balance sheets and/or to use available cash for acquisitions.
  • General Mills (GIS), which has paid dividends for 119 years without interruption or reduction, has hinted at freezing its dividend after its pricey acquisition of the Blue Buffalo pet food brand. Kraft Heinz (KHC) and United Technologies (UTX) have gone more than four quarters since their last dividend increases.
  • General Electric (GE) was the only component to contribute less income to the DG50 in Q3 2018 than it did a year earlier. And on Monday, a senior executive said yet another dividend cut is possible. Yes, GE is a mess... but maybe there's hope after hiring respected former Danaher CEO Larry Culp as its new chief executive. We'll see; a year ago, there also was great hope after John Flannery replaced Jeff Immelt.

Hut... Hut... HIKE!

A dozen DG50 companies paid increased dividends during the July-September quarter. Look at all those double-digit raises!

COMPANY RAISE AMT EX-DIV PAY
SBUX^ 20.0% .36 8/8/18 8/24/18
BAX 18.8% .19 5/31/18 7/2/18
DE 15.0% .69 6/28/18 8/1/18
WFC 10.3% .43 8/9/18 9/1/18
CAT 10.2% .86 7/19/18 8/20/18
WBA 10.0% .44 8/17/18 9/12/18
HSY 10.1% .722 8/23/18 9/14/18
ADP^^ 9.5% .69 6/7/18 7/1/18
SJM 9.0% .85 8/16/18 9/4/18
PM* 6.5% 1.14 6/21/18 7/11/18
TGT 3.2% .64 8/14/18 9/10/18
O** 0.2% .22 6/29/18 7/13/18

^ SBUX had 2 dividend raises in the past year, with the total increase of 44.0%.

^^ ADP had 2 dividend raises in the past year, with the total increase of 21.1%.

* PM had 2 dividend raises in the past year, with the total increase of 9.6%.

** O had 5 dividend raises in the past year, with the total increase of 4.0%; O pays its dividend monthly.

Seeing The Future

During the past three months, seven DG50 companies announced dividend raises to be paid in 2018 Q4. Again, most of the hikes were significant. Some folks actually were disappointed that Microsoft "only" announced a 9.5% increase.

COMPANY RAISE AMT EX-DIV PAY
MCD 14.9% 1.16 11/30/18 12/17/18
MO^ 14.3% .80 9/13/18 10/10/18
SHPG* 10.0% .168 9/6/18 10/19/18
LMT 10.0% 2.20 11/30/18 12/28/18
MSFT 9.5% .46 11/14/18 12/13/18
VZ 2.1% .6025 10/9/18 11/1/18
O** 0.2% .2205 9/28/18 10/15/18

^ MO had 2 dividend raises in the past year, with the total increase of 21.2%.

* SHPG pays a semiannual dividend in uneven amounts; the raise mentioned was the increase from Q3 2017; total increase for the year was 14.9%.

** O had 5 dividend raises in the past year, with the total increase of 4.0%; O pays its dividend monthly.

Time To Go Shopping?

Despite the fact that the bull market is charging through its 10th year, the Dividend Growth 50 does include some decently valued companies.

For example, two DG50 components are rated 5-star strong buys by Morningstar: Philip Morris (PM) and General Mills.


Both PM and GIS have had a rough couple of years, and both are in very challenging industries, so whether to invest depends upon how one views each company's "story."

Although I own Southern (SO) in my personal portfolio (as well as in the DG50), it isn't my favorite utility because it's been burdened by nuclear-plant construction issues. But its P/E ratio is under 15 and its yield is 5.5%, so I definitely can see it being attractive to DGI proponents who don't mind slow growth and a little speculation.

Those interested in a "growthier" name who are willing to own lower-yielding stocks probably could do a lot, lot, lot worse than Apple (AAPL).

It famously became the first trillion-dollar company earlier this year, and its price keeps hitting new all-time highs. Nevertheless, as this Morningstar graphic shows, Apple's forward P/E and PEG ratios are reasonable.

PepsiCo (PEP) certainly is not cheap, but it is a very high-quality brand trading at about its historic P/E ratio, and its yield is approaching 3.5%. Morningstar calls it a 4-star buy with a fair value of $123.

Other 4-star values within the DG50 according to Morningstar: Procter & Gamble (PG), Dominion Energy (D), Exxon Mobil (XOM), Coca-Cola (KO), Hershey (HSY), Smucker (SJM), Chevron (CVX), Colgate-Palmolive (CL), Shire, Wells Fargo, AT&T, GE (yikes!), and, believe it or not, Microsoft.

Conclusion

When my first few quarterly reviews showed 8% income growth for the DG50, I was plenty happy. And three months ago, when my 2Q 2018 update revealed nearly a 10% rise, I was smiling ear to ear.

So now, looking at 10.79% year-over-year income growth... here comes some more exclamation points... Huzzah!!!

Even with all of this talk about income (after all, it is the Dividend Growth 50), I do track the portfolio's total return, which recently hit an all-time high despite the struggles of GE and a few other components.

My next report about the DG50's total-return performance will be published shortly after the project celebrates its fourth birthday in mid-December.

Disclosure: I am/we are long ALL COMPANIES IN DG50. 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.