Dividend Increase | IBM

Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Realty Income for yet another dividend increase!

There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  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.  

On April 30th the Board of Directors at IBM (IBM) approved of an increase to their quarterly dividend payment.  The dividend was increased from $1.57 up to $1.62.  That works out to a 3.2% raise from the prior dividend payment.  IBM is a Dividend Contender with 23 consecutive years of dividend increases.  Shares currently yield 4.60% on a forward basis.

Since I own 30.22 shares of IBM in my FI Portfolio this raise increased my forward 12-month dividends by $6.04.  This is the 6th dividend increase I've received from IBM since initiating a position in 2013.  Cumulatively, the organic dividend growth has totaled a whopping 70.5% over that time.  According to US Inflation Calculator the cumulative rate of inflation over that same time is just 9.1%.  

A full screen version of this chart can be found here.

IBM is one of the few tech industry businesses with a 20+ year dividend growth streak.  Historically the dividend growth has been fantastic with 10%+ annual raises being the norm.  However, the business is in transition with declining revenue growth as the business attempts to pivot to more software/service offerings.  That's led to a severe dropoff in the pace of dividend growth although it appears that IBM went through a similar lull in dividend growth in the early 2000's before returning to brigther days.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1995 can be found in the following chart.  

A full screen version of this chart can be found here.

*2019's dividend growth assumes the new quarterly payout of $1.62 per share is maintained for the rest of 2019.

Based on dividend yield theory IBM appears to be quite undervalued.  However, due to the on going issues plaguing the business as well as the business itself, tech industry, dividend yield theory might not be the most appropriate valuation measure.  Not to mention the fact that as the business has struggled you can clearly see investors placing a cheaper valuation on the business and in turn a higher dividend yield as evidenced by the rising yield since 2014.  

Wrap Up

This raise increased my forward dividends by $6.04 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 2.90% this raise is like I invested an extra $208 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.

Thus far in 2019 I've received 20 total increases from 19 of the 54 companies in my FI Portfolio.  Combined those increases have raised my forward 12-month dividends by $135.75.

My FI Portfolio's forward-12 month dividends increased to $6,937.33.  Including my FolioFirst portfolio's forward dividends of $97.75 brings my total taxable accounts dividends to $7,025.38.  My Roth IRA's forward 12-month dividends remain at $463.51.

Do you own shares of IBM?  Do you think they can turn things around and return to high single digit or double digit dividend growth?

Please share your thoughts below.