Wednesday, April 27, 2016

Dividend Growth Investing at Work - 3 Pay Raises? Yes, Please!


Something I love about dividend growth investing is that each month I get to hear about companies I own deciding to pay me more money in dividends.  Just for owning a small portion of said companies.  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  That's dividend growth investing at work!  I mean who doesn't like getting a raise for doing nothing?

I had high hopes going into April expecting at least 7 dividend increases with the possibility of reaching double digit raises for the month.  The dividend increases were largely expected to be back loaded and the last week of April is off to a great start.

International Business Machines (IBM)

First up with a dividend raise yesterday was International Business Machines.  The Board of Directors for IBM announced an increase in the quarterly dividend from $1.30 to $1.40.  That's a solid 7.7% increase and also marks 21 consecutive years of raises.  IBM is working it's way towards Champion status which is quite impressive for a technology company.  Shares currently yield 3.75%.

I own 30.22 shares of IBM in my FI Portfolio so this raise grew my forward 12-month dividends by $12.09.  This is the 3rd dividend increase I've received from IBM since initiating a position in August 2013 with my income on the first shares I purchased rising 47.4%!  According to USInflationCalculator the total inflation over that same time period is just 2.2% so IBM has been killing it as far as increasing my purchasing power.


Not only has IBM amassed a length dividend growth streak the raises have been quite impressive too with 10%+ annual raises dating back to at least 2004.  Even though this latest increase was only 7.7% it will still work out to a 10.0% increase over last year because of IBM's increase/payment schedule.

IBM's struggles to grow revenue over the last decade or so have been well noted; however, thanks to very strong cash flow, a low payout ratio and share buybacks the dividend is still well covered by both earnings and cash flow.  Based on the TTM earnings of $13.42 per share the new dividend rate would still only represent a payout ratio of 41.7% and the forward payout ratio based on the consensus analyst estimates for 2016 of $13.53 would be just a 41.4% payout ratio.  On a free cash flow basis the new dividend would only take up 42.4% of the TTM free cash flow of $12,857 M.  So the dividend is still well covered by earnings and free cash flow.

I expect dividend growth to track earnings/free cash flow growth while the company continues the current transition period from a hardware/IT infrastructure to a cloud/service/artificial intelligence company.  However, I feel that I have to toot my own horn a bit since earlier this month I pegged my dividend growth forecast at 7.7% for IBM.  Nailed it!  To be fair I put a range of 7.7% to 11.5%, but I fully expected it to be closer to the low end.  That doesn't count for much of anything, but it's fun to be right every now and then.

Wells Fargo & Company (WFC)

The second raise of the day came from Wells Fargo & Company and one that I can honestly say I wasn't counting on due to the continuing regulation related to the financial crisis.  The dividend was increased from $0.375 to $0.38 which is just a 1.3% increase from the prior dividend.  This increase will also mark 6 consecutive years of dividend growth putting them as a Challenger.  Shares currently yield 2.98%.

I own shares of Wells Fargo in both my taxable account, 55.024 shares, as well as my Roth IRA, 28.087 shares increasing my forward 12-month dividends by $1.10 and $0.56, respectively.   This is the 5th dividend increase I've received from Wells Fargo since initiating a position in August 2011.  In total my dividend income has increased 216.7% from dividend increases alone!  Try getting a pay raise like that from your day job!  According to USInflationCalculator the total inflation over since I first purchase shares has amounted to just 5.9% so Wells Fargo is doing awesome with increasing my purchasing power.

The new dividend rate is still adequately covered by both earnings and free cash flow.  Earnings over the TTM came in at $4.12 and the new dividend would only be a 37.4% payout ratio.  The average analyst estimate for 2016 earnings comes in at $4.24 and the new dividend would represent a 36.3% payout ratio on a forward looking basis.  Over the TTM free cash flow amounted to $14,772 M and the new dividend rate would be a higher payout ratio of 54.0% based on the 5,178 M outstanding shares.

This dividend increase might be disappointing for some, but there was something in the announcement that I had completely forgotten since last year.  This raise had already been approved in March 2015 when Wells Fargo submitted its 2015 Capital Plan to the Federal Reserve.  The 2016 Capital Plan has been submitted for approval so I fully expect a 2nd and larger increase to be announced by Wells Fargo later this year.

Apple, Inc. (AAPL)

The third pay raise of the day came from the hands of Apple and was one I had forgotten was due this month since I only own a few shares.  The Board of Directors announced a raise in the quarterly dividend from $0.52 to $0.57 which is a solid 9.6% increase.  Apple is a Challenger in training with 4 consecutive years of increases.  Shares currently yield 2.18%.

I own just 2.3914 shares of Apple in my Loyal3 Portfolio so this increase raised my forward 12-month dividends by $0.48.  That's not much, but I'm not one to be turning down money.  This is the 2nd dividend increase I've received from Apple since initiating a position in August 2014.  In total my income from Apple has increased by 21.3% which is far outpacing the cumulative inflation rate over the same time period of just 0.6%.

The new dividend is well covered by both earnings and free cash flow with a 24.3% TTM payout ratio and a 24.8% forward payout ratio.  Based on the TTM free cash flow of $62,778 M the new dividend would account for 20.3% of free cash flow.  The dividend is safe for now although the latest earnings report wasn't exactly stellar with revenue down across all geographies and segments, except for Japan and the services lineup, with total revenue falling 12.8% year over year.  I haven't been able to fully read through the release yet, but one interesting headline number was the 31% increase in R&D costs possibly associated with the oft-rumored Apple car perhaps?

Wrap Up

For my FI Portfolio my forward dividends increased by $13.19 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 2.99% this raise is like I invested an extra $440 in capital.  Except that I didn't!  Two of the companies I own just decided to send more cash my way.  That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  That's the beauty of the dividend growth investing strategy because you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

The two raises in my FI Portfolio, IBM and Wells Fargo, go wonderfully with the 3 increases that have already been announced thus far in April.  I still expect to receive at least 3 more raises throughout the rest of the week.  So far this year I've received 21 increases from 19 companies increasing my forward 12-month dividends by $88.11.

Previous April Increases:
Procter & Gamble (PG)
Unilever (UL)
Omega Healthcare Investors (OHI)

My FI Portfolio's forward-12 month dividends are up to $5,523.68 and including my Loyal3 portfolio's forward dividends of $63.82 brings my total taxable account forward dividends to $5,587.50

Have you been pleased with your dividend growth in April?  Heavy hitters Johnson & Johnson and Exxon Mobil are due for increases this week, what kind of raises are you expecting?

Image courtesy of digitalart on FreeDigitalPhotos.net.

9 comments:

  1. Congrats on making more without working more :).

    ReplyDelete
    Replies
    1. FinTech,

      A pay raise is always nice. Especially when it doesn't require me to do anything!

      Thanks for stopping by!

      Delete
  2. Congrats JC, nice list of increases. Too bad about the AAPL price crash. Foresee a lot of dividend raises and buybacks coming though.

    ReplyDelete
    Replies
    1. Beginner,

      3 raises in a day is always great and much more than I can say from my day job! I need to look into Apple's report more but skimming through it there's some bright spots as well as some potential issues that I've been wondering about. Although they did boost up the buyback program so the price drop will just make that cash go even further.

      Thanks for stopping by!

      Delete
  3. Yeah! Also the same three raises for me! Thanks for sharing :)

    ReplyDelete
    Replies
    1. Fab,

      Glad to be a fellow shareholder of these 3 fine companies. I fully expect a second raise from WFC this year once the capital plan is approved by the Fed. JP Morgan should also give us one and I hope to see a raise from BAC too although they have a lot of work to do with reducing the share count still. Time will tell.

      Thanks for stopping by!

      Delete
  4. I saw the XOM one from yesterday. Also JNJ and AMP raised their's today, 6.7 and 11.9% respectively (if my memory is right on that). Been a good few days!

    - Gremlin

    ReplyDelete
  5. Sweet. I own all three stocks! I wasn't aware of the IBM raise. Thanks for sharing.

    ReplyDelete

  6. Admin, if not okay please remove!

    Our facebook group “selfless” is spending this month spreading awareness on prostate cancer & research with a custom t-shirt design. Purchase proceeds will go to cancer.org, as listed on the shirt and shirt design.

    www.teespring.com/prostate-cancer-research

    Thanks

    ReplyDelete