Dividend Increase | Pepsico (PEP) $PEP #Dividend

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Pepsi 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 February 10th the Board of Directors at Pepsico (PEP) approved an increase in the quarterly dividend payment.  The dividend was increased from $1.075 to $1.15 which is a solid 7.0% increase.  Pepsico is a newly crowned Dividend King with 50 consecutive years of dividend growth.  Shares currently yield 2.73% based on the new annualized payout.

The new dividend will be payable with the June payment from Pepsico.

Since I own 79.802 shares of Pepsico in my FI Portfolio, this raise increased my forward 12-month dividends by $23.94.  This is the 9th raise that I've received from Pepsico since initiating a position in 2013.  Total organic dividend growth over that time is 102.6%.

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

Pepsico has now raised dividends for half a century which is an incredible feat.  Their diversification between snacks and drinks has clearly worked out well for them over the years.  

During their dividend growth streak, Pepsico has given year over year dividend growth ranging from 2.5% to 52.1% with an average of 12.6% and a median of 11.1%.

There's been 46 rolling 5-year periods during Pepsico's streak with annualized dividend growth ranging from 4.0% to 27.0% with an average of 12.0% and a median of 10.9%.

Over that same time there's been 41 rolling 10-year periods with annualized dividend growth ranging from 7.5% to 20.2% with an average of 11.6% and a median of 11.3%.

The 1-, 3-, 5-, and 10-year rolling dividend growth rates for Pepsico since 1972 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.

Pepsico's 3-year average forward dividend yield is 2.91% which corresponds to a share price of $158 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 $144 - $175 and suggests that shares are trading on the upper end of the fair value range.

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 Pepsico can maintain 7.0% annual dividend growth shares are worth around $164 per share.

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

However, reducing the estimated growth rate to 6.0% and maintaining the 10% discount rate lowers the fair value to $122.  With a 6% growth rate and 9% discount rate the fair value becomes $163.

Wrap Up

This raise increased my forward dividends by $23.94 with zero effort on my part.  That's right, absolutely nothing to contribute to their operations.  Based on my FI Portfolio's current yield of 2.36% this raise is like I invested an extra $1,013 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.

This is the 7th dividend increase I've received from the companies in my FI Portfolio increasing by forward 12-month dividends by $79.19 combined.

My FI Portfolio's forward-12 month dividends are $9,707.23  Including my FolioFirst portfolio's forward dividends of $179.38 brings my total taxable accounts dividends to $9,886.61.  My Roth IRA's forward 12-month dividends are $932.04.  My Rollover IRA's forward dividends are $4,047.59.  Across all accounts I can expect to receive $14,866.24 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.  Pepsico'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 Pepsico? Do you think Pepsico will continue to deliver mid to upper single digit dividend growth over time?

Please share your thoughts below.