Beat The Recession With Dividends - Part 3

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Includes: ABBV, ADP, AFL, APD, BEN, CFR, CTAS, DCI, DOV, ECL, GWW, HP, HRL, ITW, LOW, MMM, SJW, SRCE, TGT, TROW, VFC, WBA
by: Michael Bryant
Summary

One needs much more than $59,000 to make $33,726 in dividend income immediately.

If one looks to dividend growth instead of yield, it may take years to decades to accumulate enough dividend income.

If an investor has $59,000 to invest, it can take him as little as 14 years to earn enough dividend income to cover the costs of retirement.

This is the third article of this series focusing solely on dividend income to beat a recession. While price may fall in a recession, dividends may rise. In the first article "Beat The Recession With Dividends," I created three portfolios of safe high-yield dividend aristocrats with a combined value of $850,000 and $950,000 to produce $33,726 per year, the average cost of retirement minus social security. In the second article "Beat The Recession With Dividends - Part 2," I showed that it is possible to pick relatively safe high-yield dividend stocks with $300,000-400,000 to get the same $33,726 per year in dividend income. But since the median retirement account balance was just $59,000 as of August 2018, is it possible to support retirement costs with dividend income using just $59,000? Since $33,726 is about 57% of $59,000 and that it is impossible to get a dividend yield of 57%, we must use dividend growth stocks to make enough in dividends to support retirement costs. How many years would it take to do this? While the previous two articles focused on beating a current or near-term recession, this article will focus on beating a future recession.

First, we must calculate what the retirement cost is each year in the future. The graph and table below estimate the cost of retirement over time using $33,726 and the average rate of increase in retirement costs per year, which is 5.8%.

Next, we must find dividend growth stocks with a high dividend growth rate and a high probability of growing their dividends in the future. To do this, two tables were created below. Tables 1 and 2 list the top 15 dividend aristocrats with the highest 10-year and 1-year dividend growth rates respectively. Each table was created by listing the 90 dividend aristocrats by decreasing dividend growth rates and selecting the top 15 companies. Statistics were added that seem to be important for ensuring the sustainability of the dividend. The dividend growth rates, payout ratio, and return on equity came from Seeking Alpha. The current ratio (plus payout ratio for HP) came from Yahoo Finance, while the debt/equity ratio came from GuruFocus. "Good" numbers are highlighted green, "warning" numbers are highlighted red, cells, where dividend growth rates were increasing, are highlighted orange, and rows with the best dividend growth trend and numbers are highlighted yellow. The years in the table are years of dividend growth.

Table 1: 15 Highest 10-YR DGR Dividend Aristocrats

Source: Created from Dividend Aristocrats: 25-Year Dividend Increasing Stocks

Table 2: 15 Highest 1-YR DGR Dividend Aristocrats

Source: Created from Dividend Aristocrats: 25-Year Dividend Increasing Stocks

Companies with increasing dividend growth rates from 10-5 YR, 5-3 YR, and 3-1 YR:

  • Table 1: Illinois Tool Works (ITW)
  • Table 2: 1st Source Corp. (SRCE), Illinois Tool Works, and SJW Corp. (SJW)

Companies with increasing dividend growth rates from 10-5 YR and 5-3 YR:

  • Table 1: Automatic Data Processing (ADP), Cintas Corp. (CTAS), Hormel Foods (HRL), and Lowe's (LOW)
  • Table 2: Automatic Data Processing, Cintas Corp., Hormel Foods, and Lowe's

Companies with increasing dividend growth rates from 10-5 YR and 3-1 YR:

  • Table 1: Donaldson Co. (DCI), Dover Corp. (DOV), and Franklin Resources (BEN)
  • Table 2: Dover Corp., Franklin Resources, and 3M (MMM)

Companies with increasing dividend growth rates from 10-5 YR:

  • Table 1: Ecolab Inc. (ECL), Helmerich Payne (HP), and V.F. Corporation (VFC)

Companies with increasing dividend growth rates from 5-3 YR and 3-1 YR:

  • Table 2: AbbVie Inc. (ABBV), Air Products & Chemicals (APD), and Cullen/Frost Bankers (CFR)

Companies with increasing dividend growth rates from 3-1 YR:

  • Table 1: T. Rowe Price (TROW) and Walgreens Boots Alliance, Inc. (WBA)
  • Table 2: Aflac (AFL) and T. Rowe Price

Companies with decreasing dividend growth rates from 10-5 YR, 5-3 YR, and 3-1 YR:

Growing dividends are a sign of potential financial strength. Increasing dividend growth rates could signal a dividend growth company that is experiencing accelerating growth and potentially greater dividends growth rates in the future. Likewise, decreasing dividend growth rates could signal a dividend growth company that is experiencing decelerating growth. Table 2 found more dividend growth companies with accelerating growth than Table 1. And Table 2 had more highlighted yellow rows than Table 1. Looking at the yellow highlighted rows, both Table 1 and Table 2 has Cintas Corp., Franklin Resources, Illinois Tool Works, and Lowe's. But Table 2 added Cullen/Frost Bankers and First Source Corp.

  • Cintas Corp., a provider of corporate uniforms and business services, seems to have 10-year, 5-year, and 3-year dividend growth rates that rose from 15% to 23%, but the rate could fall to 20% in the future due to the decline in its 1-year dividend growth rate.
  • Cullen/Frost Bankers, a Texas bank, seems to have dividend growth rates that jumped in the last year, but the rate probably would not go above 15% in the future.
  • First Source Corp., an Indiana regional bank, also seems to have dividend growth rates that jumped in the last year and a 25% dividend growth rate in the future seems possible.
  • Franklin Resources, a Californian asset manager with an additional office in India, seems to have dividend growth rates that slowly rise from 15% to 19%, and the rate could slowly rise to 25% in the future.
  • Illinois Tool Works, a manufacturer of industrial products and equipment, seems to have dividend growth rates that may grow to 30% after seeing a rapid rise from 11% to 20%.
  • Home improvement provider Lowe's seems to have 10-year, 5-year, 3-year, and 1-year dividend growth rates that remained about 20%, and this may last for the foreseeable future.

The table below is how much dividend income each investment would give. The graph below the table shows how many years it takes to make enough dividend income to cover the cost of retirement.

Number of years it takes to make enough dividend income to cover the cost of retirement:

  • Assuming a 20% DGR for Cintas Corp., it would take about 33 years.
  • Assuming a 15% DGR for Cullen/Frost Bankers, it would take about 37 years.
  • Assuming a 25% DGR for First Source Corp., it would take about 20 years.
  • Assuming a 25% DGR for Franklin Resources, it would take about 17 years.
  • Assuming a 30% DGR for Illinois Tool Works, it would take about 14 years.
  • Assuming a 20% DGR for Lowe's, it would take about 28 years.

Conclusion:

If an investor has $59,000 to invest, it can take him as little as 14 years with Illinois Tool Works to earn enough dividend income to cover the cost of retirement. The next best dividend growth stocks would be Franklin Resources, First Source Corp., Lowe's, Cintas Corp., and Cullen/Frost Bankers. Of course, putting all $59,000 in one stock is risky, so maybe dividing it among three companies is safer. And if one is 45 years old and has $59,000 saved, there are three dividend growth companies (Illinois Tool Works, Franklin Resources, and First Source Corp.) that could make enough dividends to cover the cost of retirement by age 65.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LOW, ADP, APD over the next 72 hours. 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.