Wednesday, June 8, 2016

Dividend Growth Investing at Work - Expect More, Pay Less, Get Dividend Raises

Concept of how dividend growth investing works
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Target for that 7.1% raise!
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?

June is shaping up to be a solid month for dividend payments, but what's really exciting to me is that June is also going to be an excellent month for dividend increases as well.  Yesterday the Board of Directors at Target Corporation (TGT) announce an increase to their quarterly dividend.  The prior payment was $0.56 and it's now been boosted up to $0.60.  That's a solid 7.1% increase!  This is the 49th consecutive year of dividend increases from Target placing them well into Dividend Champion status.  For perspective, that's higher dividend payments every single year since 1967!  Shares currently yield 3.50%.

Since I own 128.331 shares of Target Corporation in my FI Portfolio this raise increased my forward 12-month dividends by $20.53.  This is the 4th dividend increase I've received from Target since initiating a position in 2012.  The cumulative dividend increases over that time have amounted to 66.7%!  According to USInflationCalculator the total rate of inflation over the same time period is just 4.2% so Target is increasing my income much faster than the negative drag of inflation.

Within my portfolio this increase also moved my Target Corporation position up into the $300 Club for annual dividends.
Target Corporation Quarterly Dividend Payouts Since 2001
Target Corporation Quarterly Dividend Payouts Since 2001
It's hard to tell in the graph, but when you look at the data in a spreadsheet there's something really amazing that sticks out.  Just 8 years ago in 2008 the annual dividend payment was $0.60.  Fast forward to present day and Target will be making quarterly payouts of $0.60.

Target Corporation 1 and 5 Year Dividend Growth Rates Since 2001
Target Corporation 1 and 5 Year Dividend Growth Rates Since 2001
Target Corporation has earnings per share of $5.40 over the last twelve months so the new dividend represents a 44.4% payout ratio.  Over the last twelve months Target also had free cash flow of $3,109 M with 604 M shares outstanding making the new dividend represent a 46.6% free cash flow payout ratio.  Looking forward Target is expected to earn $5.14 for the current fiscal year which would put the payout ratio at 46.7%.

Target could make for an attractive candidate in the retail space based off it's current valuation.  The share price has fallen recently due to declining earnings stemming from backlash to their decision on bathrooms within their stores.  Consumers are typically quick to anger, but also relatively quick to forget and a couple years down the road I expect this to be just a blip on their long term record.  Personally I don't understand why companies that have locations open to the public don't make their stand by just converting the existing bathrooms into the single occupancy "family" style restrooms each with their own toilet and sink.  It seems like that would be the best solution to the controversial bathroom issue.

Back to the valuation.  On a historical basis shares of Target could be an attractive candidate.  The 5 year average P/E ratio is 17.0, but shares are currently trading at just a 12.9 P/E ratio.  The current dividend yield around 3.5% also has shares undervalued with the 5 year average yield coming in at 2.5%.

Another way to look at the valuation is using the Gordon Growth Model.  The following table shows the required dividend growth rate in order to provide varying annualized returns.

Target Corporation Gordon Growth Model Valuations
Target Corporation Gordon Growth Model Valuations
This is just a cursory look at the valuation prospects of Target and I believe it's worth a more in depth look.

Wrap Up

My forward dividends increased by $20.53 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 $686 in capital.  Except that I didn't!  One 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!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

For a dividend growth investor there's not much that's better than hearing news of a dividend increase.  So far this year I've received 24 increases from 22 companies increasing my forward 12-month dividends by $132.46.

My FI Portfolio's forward-12 month dividends remained the same at $5,573.39 and including my Loyal3 portfolio's forward dividends of $63.88 brings my total taxable account forward dividends to $5,637.26.

Do you own shares of Target Corporation in your own portfolio?  Were you happy with the dividend increase?  Is the valuation compelling enough for you to take a deeper look at this Dividend Champion?


Image courtesy of digitalart on FreeDigitalPhotos.net.

11 comments:

  1. Great post. I recently initiated a position with Target. It's great to see that it's already paying off :-)

    ReplyDelete
    Replies
    1. IH,

      It's great to see dividend increases not long after you add a new position to your portfolio. It's a quick reinforcement of how strong dividend growth investing is.

      Thanks for stopping by!

      Delete
  2. This is the 2nd article I have read recently about Target... it's almost like the universe is trying to tell me something. Good article JC, thanks for sharing!

    ReplyDelete
    Replies
    1. More Dividends,

      TGT definitely has some headwinds specifically Amazon/online retail as well as what do they do about further expansion since the Canada attempt failed pretty badly. But I still like them for the next 10 years or so and expect plenty of dividend raises in the meantime.

      Thanks for stopping by!

      Delete
  3. Yep,tgt is becoming attractive and i am thinking adding more to my account,it seems either TGT or WMT.

    ReplyDelete
    Replies
    1. desi,

      I think TGT is probably one of the better values available in the market right now and is definitely worth a more in depth look. There's headwinds/trends that are going against them but my gut says they do just fine.

      All the best!

      Delete
  4. Replies
    1. R2R,

      It's always great seeing dividend raises. Especially 7% ones!

      All the best!

      Delete
  5. JC,

    It was great news, TGT has been very good at rewarding us owners / shareholders!

    - Gremlin

    ReplyDelete
    Replies
    1. Gremlin,

      TGT has treated me very well since I purchased shares. Almost a 70% increase in income is awesome!

      Thanks for stopping by!

      Delete
  6. I sold out at 82ish, you could tell this guy was gonna drop pretty hard, it was a hard sell cause I knew some sort of dividend raise was coming, if it gets back to 65 I'll be re-initiating.

    ReplyDelete