Dividend Increase | Union Pacific (UNP)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Union Pacific for 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 December 10th the Board of Directors at Union Pacific (UNP) approved an increase in the quarterly dividend payment.  The dividend was increased from $1.07 to $1.18 which is an excellent 10.3% increase.  Union Pacific is a Dividend Contender with 15 consecutive years of dividend growth.  Shares currently yield 1.90% based on the new annualized payout.

Even better is that this increase 21.7% higher than the December 2020 payment as Union Pacific had already announced a raise in May 2021.

The new dividend will be payable December 30th to shareholders of record as of December 20th.

Since I own 26.732 shares of Union Pacific in my Rollover IRA, this raise increased my forward 12-month dividends by $10.69.  This is the 3rd raise I've received from Union Pacific since initiating a position in 2019.  

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

Union Pacific doesn't have the cleanest dividend history with a cut back in the late 1990's.  Since 2000 there's also been 3 years of no raises.  However, the business is incredibly strong with one of the best moats around.

Dating back to 2000 Union Pacific's year over year dividend growth has ranged from 0.0% to 104.0% with an average of 21.3% and a median of 19.3%.  

There's been 17 rolling 5-year periods during that time with annualized dividend growth ranging from 8.5% to 46.2% with an average of 22.7% and a median of 18.5%.

There's also been 12 rolling 10-year periods with annualized dividend growth ranging from 16.1% to 31.1% with an average of 25.2% and a median of 26.8%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates from Union Pacific since 2000 can be found in the following chart.  

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

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 3 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.

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

Union Pacific's 3-year average forward dividend yield is 2.10% which corresponds to a share price of $225 based on the new annualized payout.  

I consider the fair value range based on dividend yield theory to be the 3-year moving average yield +/- 10%.  That gives a fair value range of $204 - $250 and suggests that shares are trading on the upper end of fair value at a price of $248.

Another quick and dirty valuation method is the Gordon Growth or Dividend Discount model.  This valuation method is based solely off the expected future dividends as well as your required return.  Based on a 10% discount rate and assuming Union Pacific can maintain 8.0% annual dividend growth shares are worth around $255 per share.

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

However, reducing the expected long term dividend growth rate to 7% and keeping the 10% discount rate lowers the value of Union Pacific to just $168. 

Wrap Up

This raise increased my forward dividends by $10.69 with zero effort on my part.  That's right absolutely nothing to contribute to their operations.  Based on my Rollover IRA's current yield of 1.87% this raise is like I invested an extra $571 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.

I've now received 28 raises from the companies in my Rollover IRA increasing my forward-12 month dividends by $325.27.

My FI Portfolio's forward-12 month dividends are $9,228.19  Including my FolioFirst portfolio's forward dividends of $178.75 brings my total taxable accounts dividends to $9,409.52.  My Roth IRA's forward 12-month dividends are $893.25.  My Rollover IRA's forward dividends are $4,076.37.  Across all accounts I can expect to receive $14,379.14 in dividends over the next year.

I've also started compiling dividend data on many of the companies that I own or would like to own.  Union Pacific's can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Do you own shares of Union Pacific?  What about other railroad companies?

Please share your thoughts below.