Over the past few weeks, I’ve put together a roadmap on how income investors like us can push back the looming inflation march.
But they all revolve around one central theme that you can find in just about any corner of the market: dividend growth. Show me a rising payout and I’ll give you a stock price that’s likely to follow.
We have a big summer ahead of us, with 48 dividend increases in sight! Here is why these actions are essential for the months to come.
Why us All Need bigger dividends over time
It’s simple math.
Right now, if you were to lock in the current rates for some of the market’s most popular investments, you would be locking in a retirement with no wiggle room and full of financial anxiety.
Suppose you have a million dollar nest egg to nibble on whatever you wanted:
- The S&P 500? That would only earn you $ 13,400 in annual income.
- 10-year Treasury bills? Try $ 14,800.
- Even a “high yield” ETF like Vanguard’s VYM would only earn $ 28,200 in annual income.
Meanwhile, every day, inflation eats away the purchasing power of the meager few dollars you earn from each of these investments. But your return on cost for treasury bills won’t change, and although payments on the S&P 500 and VYM improve over time, both have many components that show little or no dividend growth. .
We need to do better, and we can, by piling our portfolio on reliable and generous sources of income.
The dividend magnet
The “dividend magnet” is one of my favorite market effects and the other reason why prioritizing dividend growth is so important.
In short, dividend growth breeds growth in stock prices.
Some ‘first level’ investors like to say that the start of dividends is the end of growth – that a dividend paying company no longer has the means to innovate, so they throw money at investors in a desperate move to maintain shareholder interest.
But in reality? A new dividend program is a statement of confidence and financial stability. A dividend paying company says, “We know we’re going to continue to be profitable and we’re going to share the wealth with you along the way. When it increases those dividends, a company doubles that sentiment, telling investors to expect even better financial performance to come.
And investors generally regard these signals as a bright green light.
Just consider Starbucks (SBUX), which began paying dividends in 2010, then nearly tripled the S&P 500 over the next decade.
In other words, dividend producers are not fair on improving our performance over time. We are also looking for the next good value for money machines!
Where to start your search
The third quarter earnings season is on the bridge, and if there’s one thing American companies are, it’s predictable.
Companies generally announce their quarterly dividends at the same time as their quarterly earnings. And best of all: they tend to increase their payments at the same time every year.
So, here I have featured almost 50 companies that are expected to dramatically increase the stake over the next three months. I’ve broken them down into four groups: the well-known blue chips, the lesser-known income gems, the dividend aristocrats, and the “quick” earning ranchers who like to go up the dial more than once a year. (Note: fat = high yield of over 4%.)
Well-known Blue Chips
Featured Action: MSCI (MSCI)
MSCI (MSCI) place is usually in the background, with its thousands and thousands of indices helping fuel many of the world’s leading funds. He is currently fighting with FTSE Russell for second place in the US in the ETF feed, while he is a No.1 fugitive in Europe. UBS estimates that funds linked to the MSCI indices have some $ 1.3 trillion in assets under management and says AUMs have reached all-time highs for seven consecutive months.
Growing markets at home and abroad mean increased demand for MSCI products. This has fueled the growth of stocks so fast that its dividend can barely keep up. The shares have risen more than 630% in the past five years, eclipsing its otherwise impressive dividend growth of 179% over the same period.
MSCI has been distributing double-digit increases for years like clockwork, including an almost 15% increase in 2020. MSCI typically announces its dividend increases at the end of August, and there’s no reason to expect that. may his generosity suddenly disappear this year.
Lesser Known Income Gems
Featured Stock: Landstar System (LSTR)
The 0.5% yield of the Landstar System makes money market accounts look generous. But every once in a while, overall performance isn’t quite what it seems.
And when it does, special dividends are usually involved.
Take, for example, Landstar, a truck broker that operates primarily in the United States, with low exposure to intermodal and global air and shipping. This is an activity that will naturally fluctuate with the US economy. So even though the upper and lower results are expected to grow over time, it is not always perfectly consistent.
Rather than over-promising and under-bidding by stretching to maintain an unsustainable regular dividend, LSTR distributes a smaller quarterly payout… then regularly throws out big special dividends early in most years. It kicked off 2021 with a special distribution of $ 2 per share that more than triples its annual return to almost 1.8%.
OKAY. You don’t get rich quick that way, but a combination of big special dividends and a growing regular payout (2020 saw a 13.5% increase to 21 cents per share), LSTR is worth watching for. dividend growth investors. If you decide to watch Landstar, it is at the end of July that it is likely to announce its next dividend move.
Featured Stock: Illinois Tool Works (ITW)
Dividend aristocrats have a reputation for slow dividend growth, and for understandable reason. If you increase your payment every year since at least a quarter of a century ago, there’s a good chance it wasn’t fully funded with equal profit growth along the way.
Instead, it’s more likely that, especially over the years, your payout ratio has grown a bit more year after year to keep shareholders happy.
So it’s important to temper our expectations, but we can find decent dividend growth in at least a few aristocrats. Illinois Tool Works (ITW) is among them.
ITW manufactures and supplies a range of tools and systems, from construction products and food equipment to polymers and fluids to measurement electronics. Not surprisingly, ITW’s business can be cyclical, but its exceptional product diversification keeps demand for its products… and keeps shareholders paid.
Illinois Tool Works has improved its dividend for 46 consecutive years, including an increase of more than 6% to $ 1.14 per share announced last August. This happened despite what ended up being an understandable year of decline for ITW, so we’ll all be curious to see what the company pulls out of its hat later this summer.
Quick gains breeders
Featured Stock: Microchip Technology (MCHP)
Here and there you’ll find a few special companies that don’t just show off their generosity once a year. Instead, they top up the payment every six months or even quarterly.
For the most part, these are the usual suspects. Real Estate Investment Trust (REIT). Master Limited Partnerships (MLP). Companies that are already forced to share their wealth.
But there is a curve or two in this lot.
Take Microchip Technology (MCHP), which, as you might have guessed by the name, belongs to the semiconductor industry. Its microcontrollers, radio frequency devices, analog devices and other products serve a multitude of industries, from aerospace to defense to Ethernet and technologies that must operate at extremely high temperatures.
MCHP is a light weight among its fast-growing dividend peers, with just over 1% annual return. But its combination of business growth and revenue expansion is formidable. Not only has the company increased its payouts by over 12% over the past year, but it has done so through larger payouts each quarter during that time, giving investors a slight compound advantage over companies that only announce dividend increases each year.
The next statement is expected to arrive in early August, but if you miss it don’t worry, there’s always another just around the corner.
Brett Owens is Chief Investment Strategist for Contrary perspectives. For more great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.