Friday, July 1, 2016

Dividend Growth Investing At Work - 100+ Years and 2 Quarterly Raises

Concept of how dividend growth investing works
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks General Mills for another 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?

Well that was unexpected.  Like they'd done for several years now General Mills (GIS) announced a dividend increase for the May payout.  Surprise, surprise they gave investors a second raise in as many quarters.  On Wednesday the Board of Directors announced an increase to the dividend from $0.46 to $0.48.  That's a 4.3% raise from last quarters payment, but an excellent 9.1% raise from the year ago period.  General Mills has increased dividends for 13 consecutive years placing them as a Dividend Contender.  Even more impressive is that they have over 100 years of dividends not being reduced.  Shares currently yield 2.69%.

Since I own 65.276 shares of General Mills in my FI Portfolio this raise increased my forward 12-month dividends by $5.22.  This is the 4th dividend increase I've received from General Mills since initiating a position in late 2013.  The cumulative dividend increases over that time have amounted to 26.3%!  According to USInflationCalculator the total rate of inflation over the same time period is just 3.1% so General Mills is far outpacing the rate of inflation.

General Mills Quarterly Dividend Payment History Since 2001
General Mills Quarterly Dividend Payment History Since 2001
General Mills' dividend history is a bit spotty with an inconsistent increase schedule and even holding the dividend flat for multiple years.  While the dividend might not have the consistent growth that other companies provide very few companies can stake the claim of never reducing the dividend in over a century.  Just for some perspective 100 years ago the world was embattled in World War I.

General Mills Dividend Growth and Annualized Growth Rates Since 2001
General Mills Dividend Growth and Annualized Growth Rates Since 2001
Dividend growth has been quite strong historically with the lowest annualized growth rate at a very respectable 6.4%.  The rolling 5 year dividend growth rates are equally impressive with the lowest rate, with a full 5 years of increases, coming in at 8.5%.  Not bad at all.

The dividend looks like it could be at risk based on the trailing twelve months earnings per share of $2.45.  If those earnings were repeated the new dividend would represent a 78% payout ratio.  Although analysts expect earnings to grow to $3.04 per share for the current fiscal year ending in May 2017 so the payout ratio is a much more palatable 63%.  That's still a bit high for my liking, but it's not worrisome around that level.  Based on the trailing twelve months of free cash flow the total cash dividend payment looks even better at just a 54.5% payout ratio.

General Mills is dealing with some headwinds to their operations right now specifically with currency exchange and declining cereal sales.  In my opinion the currency exchange isn't too concerning as it should even out over the long run; however, declining sales are something to keep an eye on.

Of course investors seem to be ignoring the issues or are placing a high premium on the relatively stable business of General Mills.  As such at yesterday's closing price of $71.32 the forward P/E ratio based on the current fiscal year ending in 2017's estimates puts the P/E ratio at a very rich 23.5.  Especially considering that earnings are only forecast to grow 5.5% per year for the next 5 years.

Medtronic has done very well for me since I became an owner.  Over 60% income increase and a 100%+ price appreciation return is great to see.  However, we invest for the future so I like to use the Gordon Growth Model as a quick reference to determine whether the company could be attractively valued and therefore need more research.  The following table shows the required dividend growth rates in order to provide varying annual returns.

General Mills Gordon Growth Model Valuations
General Mills Gordon Growth Model Valuations
Based on the Gordon Growth Model, General Mills looks expensive for my own tastes.  The required dividend growth rates look reasonable based on the historic growth rates; however, we invest for the future and a high payout ratio coupled with just 5.5% expected earnings growth will likely cap dividend growth.  Add in the fact that P/E multiple compression is likely to occur as well as the headwinds facing the company and it's probably best to wait for better value opportunities in the future.

Wrap Up

My forward dividends increased by $5.22 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 2.98% this raise is like I invested an extra $176 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 27 increases from 23 companies increasing my forward 12-month dividends by $156.66.

My FI Portfolio's forward-12 month dividends increased to  at $5,597.59 and including my Loyal3 portfolio's forward dividends of $63.68 brings my total taxable account forward dividends to $5,661.27.

Previous dividend increases during the month:

Target Corporation (TGT)
Realty Income (O)
Medtronic plc (MDT)

Do you own shares of General Mills?  Are you interested in adding this consumer staple to your portfolio?

Image courtesy of digitalart on


  1. Passive Income Pursuit,

    GIS has been awesome! I bought it at $35.07 after they split in my Roth. I wish I got some more of it.

    1. SWAN,

      GIS has been excellent for me as well although I didn't get in nearly as early as you did. Although I'm not complaining about over a 50% total return so far.

      Thanks for stopping by!

  2. I'm glad you mentioned the second GIS raise. I already forgot about the first and here comes another raise which would have been a healthy raise on it's own.

    1. Captain,

      I was a bit surprised to see a second raise from this since they raised it last quarter too, but there's no complaints on my end about them boosting my income up a bit more. This raise by itself would have been just a so so raise but adding them together pushes the increase to over 9% compared to last year which is awesome.

      All the best.

  3. GIS is a great company I agree.

    I always love looking at actual yield versus current yield. As an example if I buy a company at $10 when they're yielding 2%(.20 per share) and the stock price rises to $40 with a 2% yield(.8 per share), my purchase doesn't just appreciate in value but I'm yielding 8% based on my actual purchase price!