What to do about slowing earnings growth?

Successful dividend growth investing relies on finding companies at an attractive price which can grow earnings and dividends over time. A long track record of annual dividend increases is an indication of a strong business model that generates a lot of excess cash, beyond the needs for growing the business. This is the characteristic for most of those dividend champions, which shower their shareholders with more cash every year.

One of the monitoring tools at my disposal involves checking the list of dividend increases, and analyzing companies every 12 – 18 weeks. I have noticed that several of the companies I own have been unable to grow earnings per share over the past few years. Some recent examples include Coca-Cola, Procter & Gamble and Colgate Palmolive.

Some of it could be due to the changing competitive and business nature at an individual company basis. The other reasons for slowing earnings growth is due to external factors such as:

• The strong US dollar
• Weaker International Economic Growth
• Weak energy prices
• Higher Competitive Pressures

14 Dividend Champions for Further Research

The list of dividend champions includes companies which have managed to increase dividends every single year for at least 25 years in a row. This is a very rare occurrence, and is indicative of a company that has a unique business model that withstood the test of time. Only a company with a unique set of competitive advantages can manage to grow the business, maintain its dominant industry position, and shower shareholders with more cash every single year for at least a quarter of a century. As of the time of this writing, there are 109 such businesses in the US. The list of Dividend Champions is maintained by David Fish, who is a true superhero for ordinary dividend investors.

After obtaining the list every month, I try to get it to a more manageable level by weeding out companies whose dividends are at risk.

My screening criteria on the list of dividend champions includes:

1) P/E ratio at or below 20
2) Dividend Payout Ratio below 60%
3) EPS growth over the past decade
4) Dividend Growth exceeding 3%/year

The companies which met this criteria include:

John Bogle Likes Dividends

John Bogle is an investing legend. He is the founder of Vanguard Group, a $4 trillion dollar mutual fund powerhouse. Vanguard is credited for single handedly rolling out the first index mutual fund in 1976. It gave millions of investors around the world the opportunity to invest at a low cost.

I have read several of his books, and really enjoyed his simple messages. I really liked Bogle's message on keeping costs low, keeping turnover low, staying the course and keeping it simple. I liked the advice the minute I read it.

It makes sense that when you do not pay 1%/year to a greedy asset manager, you have more money working for you.

I have been inspired by Bogle to find a way to educate investors and help them get their fair share of returns. For example, building a diversified portfolio of dividend companies will only cost a one time brokerage fee. This means that the investor’s only cost is to buy the diversified list of blue chip stocks for their portfolio. Their job is to then remain patiently invested. That way, they will not have to pay an annual fee for the privilege of someone else picking well-known companies for their portfolios. After all, I do not need to someone else to buy Johnson & Johnson with my money, and charge me an annual fee in the process. This is a well-known business.

I especially liked Bogle’s advice on dividends. In his books, he discusses how share returns are dependent in three factors:

Why Holding 100% of Equity Investments in Taxable Accounts is a Mistake

One of the best vehicles for accumulating a nest egg for ordinary investors is the 401 (k). For most employees of large companies, they get the ability to contribute as much as $18,000/year, and get a tax break in the process. The money is then invested in those 401 (k) plans, and grows tax-free for decades, until it has to be withdrawn at retirement. At that point, the withdrawals are taxed as ordinary income for pre-tax plans, and not taxed for after-tax ones. This is the best way to invest for someone who holds a demanding day job, and spends a lot of time on family affairs, and is not able or willing to dedicate even 10 hours/week on their goal of retirement or financial freedom. This is the best way for probably 80% of employees out there. Those include most investors that probably have no clue about investing, economics, business, the difference between preferred stock and livestock, and are not going to spend the time or effort to learn about it. A very close relative of mine invests entirely in index funds in their 401 (k) and Roth IRA every month, and have ok over the past decade.

I have been thinking about it, and think that this is also a very good way to invest for the average self-directed investor. Basically, what I am trying to say is that the ability to defer taxes in a 401 (k) today, enjoy tax-deferred compounding for decades, and earn an employee match on contributions is a more advantageous place for your money than a taxable portfolio. This is because by investing in a taxable portfolio, you are essentially able to place much less money to work for you. In addition, in a taxable account your capital gains and dividends are taxed during your accumulation phase, when your total income is usually at its the highest. Thus, even a portfolio of the best dividend paying stocks has to perform at least a couple percentage points better per year, in order to keep up with the tax-advantaged performance of investments in a 401 (k). In my case, I am getting a 25% effective discount from my purchase price by investing through a tax-deferred account.

Two REITs Delivering High Growing Income for Retirees

As you know, I review the list of dividend increases every single week as part of my monitoring process. I usually focus my attention on the ones that have raised distributions every single year for at least a decade. Over the past week, there were two real estate investment trusts, which raised dividends for their shareholders. These are well known, and widely held Real Estate Investment Trusts (REITs). REITs are a great way to obtain exposure to real estate for DYI investors. The companies include:

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. Realty Income raised its monthly dividend to 21.10 cents/share. This REIT is a dependable dividend achiever which has rewarded shareholders with a raise for 23 years in a row. Realty Income calls itself “The Monthly Dividend Company”. This is a very well run REIT, whose sole purpose is to shower shareholders with monthly dividend checks. I really like the stability of the long-term triple-net type leases that Realty Income uses to rent out its properties. The long-term track record of dividend increases is very impressive.

Target: An Attractively Valued Dividend Champion on Sale

Target Corporation (NYSE:TGT) operates general merchandise stores in the United States and Canada. Target is a dividend champion, which has paid dividends since 1965 and raised them every year for 49 years in a row.

The most recent dividend increase was in June 2016, when the Board of Directors approved a 7.10% increase in the quarterly dividend to 60 cents/share.

The company's largest competitors include Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST) and Amazon (NASDAQ:AMZN).

Over the past decade this dividend growth stock has delivered an annualized total return of 1.60% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders. More recently, the stock price has been hammered by a decline in earnings expectations. This is why I wanted to take another look at Target.

The company has managed to deliver a 3.60% average increase in annual EPS over the past decade. Target is expected to earn $4.01 per share in 2018 and $5.80 per share in 2019. In comparison, the company earned $4.09/share for fiscal year 2017.

Canadian Banks for Long Term Dividend Growth Investors

I have owned shares of the largest Canadian Banks as a long-term investment for over four years now. I initiated a position in those five banks in early 2013, and then added some more in late 2013.  I also added a little more a couple of years later. If prices make sense, and I have money to invest, I will likely make another investment. The banks include:

Bank of Montreal (BMO) provides various retail banking, wealth management, and investment banking products and services in North America and internationally. It has operations in the US, in the form of BMO Harris Bank. Bank of Montreal has paid dividends since 1829. Over the past decade, Bank of Montreal has increased quarterly dividends per share by 3.10%/year. And that’s despite the fact that the dividends were as left unchanged in 2009, 2010 and 2011. Earnings per share have increased by 3%/year over the same time period. The bank sells for 14.90 times earnings and yields 3.40%.

Colgate-Palmolive (CL) Dividend Stock Analysis for 2017

Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. The company operates in two segments: Oral, Personal and Home Care; and Pet Nutrition. This dividend king has paid dividends since 1895 and has increased them for 54 years in a row.

The company’s latest dividend increase was announced in March 2017 when the Board of Directors approved a 2.60% increase in the quarterly annual dividend to 40 cents /share. This was the slowest rate of dividend increases since 1980. It indicates that the company's management is cautious about Colgate-Palmolive's near term business outlook.

The company’s peer group includes Procter & Gamble (PG), Clorox (CLX), and Kimberly Clark (KMB).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.50% to its shareholders.

Honeywell Beats GE On The Following Four Points

This guest post has been wrote by Mike McNeil, passionate investor, founder of Dividend Stocks Rock and author of The Dividend Guy Blog.

The current bull market hides many companies flaws. In fact, since 2009, almost all stocks have gone up one way or another. My 11-year-old boy could probably do as well as most investors on the street. This situation makes it even more difficult for investors to differentiate the good picks from the bad seeds. For example, when you look at the Honeywell (HON) and General Electric (GE) stock price graph for the past 5 years, both seem to be a good investment:

Source: YCharts

While Honeywell (HON) clearly outperformed General Electric during this period, most GE shareholders won’t complain about its performance. I know that General Electric is a very popular stock among investors. The company has been around for over 100 years, and has performed quite well for decades. However, I believe the current bull market is hiding many flaw, and Honeywell is a better option for those who look at adding an industrial stock to their portfolio. Ironically, Honeywell  failed to merge with General Electric back in 2001.

As a dividend growth investor, my focus when analyzing companies is payouts and potential increase. In order to do so, I have studied 3 components leading to sustainable payment increase as per the 7 dividend growth investing principles:

Five Myths About Index Investing

Index investing has become extremely popular in recent years. A lot of new investors have embraced the strategy in recent years. Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true. I am going to examine several of their problematic thought points, and discuss why they are myths that could hurt those investors in the future. In reality, there is nothing magical about index investing.

I will refute the five myths below:


1) Indexing is passive investing.

Indexing is not passive, because there is a requirement for the investor to exercise judgment as to which index funds to select.  It then also imposes forced market timing through buying and selling of assets at certain time periods. In addition, the indexes themselves comprise portfolios of individual stocks or bonds which constantly add or remove components for a variety of reasons. One recent example includes this advisor, who decided to add to international stocks in early 2015, rather than stick to their original allocation. This is market timing, dressed up in indexing clothes.

Index investors fail to understand the fact that an index is merely a collection of investments, that is actively selected by a group or a committee, using some sort of a quantitative or arbitrary reason. For example, the index committees on S&P 500 or Dow Jones Industrial Average make active component changes for various reasons. As you can see, an index investor actively chooses their funds, and then the funds themselves actively choose the components using some criteria.

Eight Dividend Growth Stocks Raising The Bar

As part of my monitoring process, I evaluate the list of dividend increases every week. This exercise helps me observe the rate of dividend growth for companies I own. It also helps me to familiarize myself with other dividend growth companies. I also believe that running through the list, and narrowing it down to a more manageable level using my screening criteria is helpful to readers for educational purposes. I find it helpful to run through the exercise of narrowing the list of companies that raised dividends in a given week, by focusing on those that have raised dividends for at least ten years in a row. I also find it helpful to then evaluate each company quickly, using my well-publicized entry criteria, and then zooming in further on the fundamental performance and valuation criteria in order to determine whether a stock is worth a further look today. This is the type of decision making that goes in my head while I review different companies.

Over the past week, there were several dividend companies with a track record that raised distributions. The companies include:

How Warren Buffett earns $1,278 in dividend income per minute

On April 1st, 2021, Buffett’s Berkshire Hathaway (BRK.B) will receive $168 million dollars in dividend income from their 400 million shares of Coca-Cola (KO). This comes out to roughly $1.841 million in dividend income per day, $76,712 dollars in dividend income per hour, $1278 dollars in dividend income for Berkshire Hathaway every minute, or almost $21.31 every single second. 

Those shares have a cost basis of $1.29 billion dollars, and were acquired between 1988 – 1994. This comes out to $3.25/share. The annual dividend payment produces an yield on cost of over 51.70%. This doesn’t assume dividend reinvestment and is several times higher than what investors in US Treasuries would be earning today. This is why I believe that Warren Buffett is a closet dividend investor.

This is a testament to the power of long-term dividend investing, where time in market is the investors best ally, not timing the market. If you can select a business which is run by able and honest management, which has solid competitive advantages, and which is available at a good price today, one needs to only sit and let the power of compounding do the heavy lifting for them. As Buffett likes to say, time is a great ally for the good business. In the case of Coca-Cola, the past 33 years have been a great time to buy and hold the stock. The company has been able to tap emerging markets in Eastern Europe, Asia, Africa and Latin America like never before. As a result, it has been able to receive a higher share of the worldwide drinks market, which has also been expanding as well. If you add in strategic acquisitions, new product development, cost containment initiatives and streamlining of operations, you have a very powerful force for delivering solid shareholder returns. With dividend investing your are rewarded for smart decisions you have made years before.

If they closed the stock market for a period of 10 years, Buffett would still be earning steady cashflow from his investment in Coca-Cola. This is because ten years from now, the company would likely be earning more than what it is earning today, and would likely be distributing more in dividend income than it is paying to shareholders today. Receiving a huge dividend check every three months is a reminder that you are a shareholder in a real company with real products that are consumed by billions of consumers worldwide. The stock is not a lottery ticket but a partial ownership in a company, which entitles you to a share of the profits being paid out to you as a shareholder in the form of dividends.

At the end of the day, if you identify a solid business, that has lasting power for the next 20 – 30 years, the job of the investor is to purchase shares at attractive values, and hold on to it. This slow and steady approach might seem unexciting initially, but just like with the story of the slow-moving tortoise beating the fast moving hare, the power of compounding would work miracles for the patient dividend investor.

In the case of Warren Buffett's investment in Coca-Cola, he is able to recover his original purchase price in dividends alone, every two years. Even if Coca-Cola goes to zero tomorrow, he has generates a substantial returns from dividends alone, which have flown to Berkshire's coffers, and have been invested in a variety of businesses that will benefit Berkshire Hathaway's shareholders for generations to come.

Currently, Coca-Cola is selling for 24.70 times forward earnings and yields 3.17%. This dividend king has managed to increase dividends for 59 years in a row.  

There are only 29 companies in the entire world which have gained membership into the exclusive list of dividend kings. Over the past decade, Coca-Cola has managed to increase dividends by 6.40%/year, equivalent to dividend payments doubling every eight and a half years. This is much better than the raises I have received at work over the past decade, despite the fact that I have routinely spent 55 - 60 hour weeks at the office.

Full Disclosure: Long KO and one share of BRK.B

Relevant Articles:

- Coca-Cola: A wide-moat dividend growth stock to buy and hold
- Warren Buffett Investing Resource Page
- Seven wide-moat dividends stocks to consider
- Warren Buffett’s Dividend Stock Strategy
- The importance of yield on cost