The financial crisis has been tough not only for stock prices but also for dividends as well. Some former dividend darlings in the financial sector have seen their dividends being cut or eliminated after taking in billions in TARP aid due to severe losses from complex financial instruments. As a result the ratio of dividend increases to dividend cutters has been hovering at almost even for both. This means that so far in 2009, there is roughly one dividend cutter for every dividend raiser. Over the past 5 years this ratio has been more like 6 to 1 in favor of the dividend growers.
Due to the horrifying statistics of the overall bleak dividend picture, some reporters are claiming that dividend investing is dead. Just because you read it in the paper however, doesn’t mean it is true for everybody. While the overall statistics have been rather scary, the negative dividend news has been concentrated in the financial sector. Thus a well-diversified portfolio of income stocks should have performed well even during crisis.
Broad statistics on dividends could be misleading however as they focus on all companies, not just on the ones which have a proven track record of raising dividends. Even if the sky truly is falling down, there still are companies, which are generating enough cash flows and are confident enough in their business to increase distributions. In fact the dividend aristocrats index with its 52 components has seen 8 dividend cuts, one buyout and 32 dividend increases so far in 2009.
In addition to that, most dividend growth strategies tend to evaluate sustainability of dividends on a per issue basis, thus weeding out companies whose dividends are in peril. It really is a no brainer that a company, which generates enough earnings to cover dividend payments by a factor of 2 or 3, is much less likely to cut or eliminate distributions compared to a company, which pays out almost all of its cash flows out as dividends. This simple formula does exclude certain vehicles such as REITs for example, which are required to distribute almost all of their earnings as distributions to shareholders in order to maintain their tax status. Thus, these vehicles (such as REITs) should be evaluated using other criteria, which I would describe in a future post.
I have selected several prominent dividend growth stocks, whose earnings and cash flows provide adequate coverage for their dividends:
Investors should be cautioned that entry price does matter. Thus this list should only be considered as a starting point in the process of analyzing potential dividend stock candidates. Chances are that a dividend growth stock that manages to grow earnings is a likely candidate to continue growing distributions, which will increase yield on cost over time.
Full Disclosure: Long ABT, ADM, ADP, AFL, APD, CLX, EMR, FDO, GW, JNJ, MCD, MHP, MMM, NUE, PG, SHW, WMT
This post was featured on 10 Best Roundup for the Week of August 24, 2009 by blogger JLP from AllFinancialMatters.
Relevant Articles:
- Dividend Aristocrats - YTD dividend raisers versus cutters
- Yield on Cost Matters
- TARP is bad for dividend investors
- Why should companies pay out dividends?
Popular Posts
-
I review the list of dividend increases every week as part of my monitoring process. Dividend increases provide signaling value to me in my ...
-
Last week, there were nine companies that raised dividends in the US. Only two of those companies have managed to raise dividends for at lea...
-
“In bear markets, stocks return to their rightful owners.” - J.P. Morgan I love this quote. It summarizes a ton of insights into a simple,...
-
The stock market has been turbulent the past month or so. As a dividend growth investor, I usually ignore the ups and downs of the market. ...
-
I tend to focus my attention on companies that regularly increase dividends to shareholders . A long history of annual dividend increases is...
-
The last two weeks have been a little turbulent. Those tariff news really seem to have spooked markets worldwide. Luckily, we are Dividend ...
-
The Procter & Gamble Company (PG) provides branded consumer packaged goods worldwide. It operates through five segments: Beauty; Groomin...
-
I was reviewing my old files and re-visited an interesting paper from Standard & Poor's from a few years ago about the importance of...
-
My retirement strategy is based on living off dividends . A successful retirement strategy is dependent on the asset returns you hold in you...
-
The past few months have been difficult for many investors. Stocks are down from their all time highs, reached just a few months ago. It is ...