As part of my monitoring process, I review the list of dividend increases every week. I use this process to evaluate existing holdings and also to identify hidden dividend gems. I find it helpful to observe the pulse of dividend increases in my overall monitoring process.
I looked at the list of dividend increases and then narrowed it down to include those companies that have raised distributions for at least a decade.
The next step includes a focus on each company’s dividend increase and comparison to its ten-year average. After that, I am reviewing the trends in fundamentals, in order to determine if dividend growth is sustainable, and derived from earnings growth. In general, I want to focus my attention on companies which grow earnings and dividends in tandem; I want to avoid companies with stagnant earnings that grow dividends through the expansion in the dividend payout ratio. I have found that the companies with the safest dividends tend to have an adequate dividend payout ratio and growth in earnings per share to deliver future dividend growth and provide an added margin of safety against short-term turbulence.
Last but not least, I also evaluate the valuation of each company. In general, I want to focus on companies with solid fundamentals, which are also available at attractive valuations.
Ingredion Incorporated (INGR) produces and sells starches and sweeteners for various industries. The company operates through four segments: North America, South America, Asia Pacific, and Europe, and the Middle East and Africa. The company raised its quarterly dividends by 4.20% to 62.50 cents/share. This marked the 8th consecutive annual dividend increase for this dividend challenger. The ten-year dividend growth is 18.60%/year. Earnings grew from $3.52/share in 2008 to $7.06/share in 2017. Ingredion is expected to earn $7.50/share in 2018. Right now, the stock is attractively valued at 13.90 times forward earnings and yields 2.40%.
McDonald’s Corporation (MCD) operates and franchises McDonald’s restaurants in the United States and internationally. Its restaurants offer various food products, soft drinks, coffee, and other beverages, as well as a breakfast menu. The company raised its quarterly dividend by 14.90% to $1.16/share. This marked the 43rd consecutive annual dividend increase for this this dividend challenger. The ten-year dividend growth is 9.80%/year. Earnings grew from $3.76/share in 2008 to $6.37/share in 2017. McDonald’s Corporation is expected to earn $7.67/share in 2018. The stock is slightly overvalued at 21.60 times forward earnings but yields 2.80%. McDonald’s may be worth a second look below $150/share.
Realty Income (O) The Monthly Dividend Company is an S&P 500 company dedicated to providing stockholders with dependable monthly income. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 5,400 real estate properties owned under long-term lease agreements with regional and national commercial tenants.
Realty Income raised its monthly dividend to 22.05 cents/share. The new dividend is 4% higher than the dividend paid during the same time last year. The monthly dividend company has managed to reward shareholders with multiple dividend increases per year since going public in 1994. The ten-year dividend growth is 4.40%/year. This was supported by growth in FFO/share from $1.89 in 2007 to $3.06 in 2017. The REIT yields 4.60% and is selling at 18.60 times FFO. I would prefer Realty Income below$53/share.
W. P. Carey Inc. (WPC) is an independent equity real estate investment trust. The firm also provides long-term sale-leaseback and build-to-suit financing for companies. It invests in the real estate markets across the globe. The firm primarily invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties. The REIT raised its quarterly dividend to $1.025/share. The new rate is 2% higher than the dividends paid during the same time last year. W.P. Carey has raised dividends every year since going public in 1998. The ten-year dividend growth rate is 8%/year. Since 2007, FFO/share has grown by 4.70%/year. The REIT yields 6.20%. I find W.P. Carey to be attractively valued today at 12.20 times AFFO.
Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates through Productivity and Business Processes, Intelligent Cloud, and More Personal Computing segments. The company raised its quarterly dividend by 9.50% to 46 cents/share. The forward dividend yield is 1.60%. This marked the 17th consecutive annual dividend increase for this dividend achiever. The ten-year dividend growth is 14.50%/year. Microsoft has managed to increase its earnings from $1.62/share in 2009 to an estimated $4.28/share in 2018. The stock is overvalued at 26.70 times forward earnings. Microsoft may be worth a second look on dips below $85/share.
