I am all smiles after a handful of dividend increases were announced in the DGI For The DIY portfolio. Over the last two weeks, 5 more companies declared new dividend rates, providing me with another nice boost to my income.
With these increases, ten of the eleven companies from my portfolio dividend growth projections have now made announcements. I previously wrote about the increases from Polaris Industries, Church & Dwight Co. and Gilead Sciences, and Coca-Cola and Dr Pepper Snapple. Today I will give my thoughts on the most recent increases coming from Xcel Energy Inc. $XEL, Ross Stores, Inc. $ROST, GameStop Corp. $GME, Digital Realty Trust $DLR, and QUALCOMM Inc. $QCOM.
For a refresher, here were my predictions for the dividend increases:
Let’s take a look those predictions and see how they compare with the recent announcements.
Investor relations: Xcel Energy Inc.
Prediction: Raise from $0.34 to $0.365, an increase of 7.38%.
Actual: Raise from $0.34 to $0.36, an increase of 5.88%.
In hindsight, I was a bit too optimistic in looking for the extra half penny on the increase. Xcel Energy has guided for 5-7% dividend growth as part of their shareholder return policy, and the two-cent increase falls in the middle of that guidance.
The dividend increase brings the payout ratio up to about 62% of expected 2017 earnings. Management is guiding for 4-6% EPS growth, 5-7% dividend growth, and a payout ratio target of 60-70%, With the current payout ratio now on the low-end of guidance, it seems there is a very good chance that investors will see ~6% dividend growth for the next several years going forward.
Investor Relations: Ross Stores, Inc.
Prediction: Raise from $0.135 to $0.15, an increase of 11.11%.
Actual: Raise from $0.135 to $0.16, an increase of 18.52%.
Ross Stores gave a full penny more than I was expecting, which was a pleasant surprise for me. The annualized rate of $0.64 gives a payout ratio of ~20% on expected fiscal year 2017 earnings, which is in line with historical payout rates.
In addition to the dividend increase, Ross Stores also announced a new $1.75B share repurchase program, which represents roughly 6.6% of the company’s current market cap. This program will be executed over the next two years, and should provide another 3% annual boost to earnings growth.
ROST has been one of the best retail stocks in the market for some time now, and I don’t see that changing any time soon. I expect the low double-digit dividend and earnings growth to continue going forward.
Investor Relations: GameStop Corp.
Prediction: Raise from $0.36 to $0.37, an increase of 2.78%.
Actual: Raise from $0.37 to $0.38, an increase of 2.70%.
I was correct in my prediction of a one cent raise, however I mistakenly had $0.36 as the previous payout rate. Regardless, the new increase shows caution from management as GameStop continues to reinvent its business.
The company has focused efforts on growing its revenues from technology brands, mobile, and collectibles. However, these segments now make up just ~30% of earnings, and questions remain if they can overcome the decline being seen in physical video games.
These growth concerns has the market pricing shares at a PE of just 6.7. As a result, shares are yielding 6% despite a reasonable payout ratio of around 40%.
The questions about growth have kept me from putting anymore new capital into my position. However, I do believe the dividend is safe, and am willing to continue reinvesting those dividends while I wait for a turnaround. My expectation is that dividend growth will remain low until the company can get earnings moving up again.
Investor Relations: Digital Realty Trust Inc.
Prediction: Raise from $0.88 to $0.93, an increase of 5.68%.
Actual: Raise from $0.88 to $0.93, an increase of 5.68%.
I was spot on with my prediction for Digital Realty. The company boosted the dividend by five cents, bringing the payout ratio to 62% of estimated 2017 FFO, and 68% of AFFO. This 5.7% raise is greater than the last couple of raises have been, so it seems that the company has gotten the payout ratio to the sub-70% level it is now comfortable with.
My expectations going forward are for dividend growth to roughly match AFFO growth. Analysts are now forecasting long-term AFFO growth of around 6%, which coupled with a current yield of around 3.5%, could produce roughly 10% annualized total returns over the coming years.
Digital Realty Trust is the largest position in my portfolio on a value basis, and second on an income basis. I have no plans to trim shares as I remain bullish on the data center sector, and see continued tailwinds leading to further growth ahead. Data use by consumers, government, and business keeps growing at a breakneck pace, and with DLR being one of the biggest and financially strong companies in the sector, it should continue to benefit from this trend.
Investor Relations: QUALCOMM Inc.
Prediction: Raise from $0.53 to $0.58, an increase of 9.43%.
Actual: Raise from $0.53 to $0.57, an increase of 7.55%.
QUALCOMM’s dividend boost came in a penny short of my predicted number, but this wasn’t a surprise. This is what I wrote in my analysis:
I may be a tad high on my projection of a 9.4% increase to $0.58, but I think it is reasonable based on expected earnings growth of 7.5% and its recent history of double-digit dividend growth. That said, I wouldn’t be surprised if the increase is much smaller this year as they company appears to have plenty of other needs for its cash in 2017.
It appears that management did hedge the increase a bit and played it safe in the dividend. This is completely understandable considering the upcoming $47B acquisition of NXP Semiconductors $NXPI. This will be a big use of QUALCOMM’s cash, although I assume much of will be foreign reserves that would otherwise be subject to U.S. taxes.
Overall, I think the NXP acquisition will be a big benefit to QCOM going forward, as it offers an avenue for growth and a way to diversify the company’s portfolio. Another benefit is that the acquisition is being made through cash on hand and debt, and not through issuance of shares. This should give a boost to EPS as it adds earnings and revenues without any dilution to the share count.
With this raise, QCOM shares are now yielding nearly 4%, and I think mid to high-single digit EPS growth is possible going forward. Add the two together, and I believe there is good potential for double-digit total returns over the long-term.
These characteristics caused QUALCOMM to be selected as the #1 pick for the Top 10 Technology Stocks For Dividend Growth And Income.
Summary & Conclusion
These five dividend raises were all close to my expected numbers, and there really weren’t any big surprises from the announcements. I was pleasantly surprised to see the 18% growth from Ross Stores, while QUALCOMM and Xcel Energy came in slightly below my optimistic numbers.
I’m hoping that the last company on my watch list, Chatham Lodging Trust $CLDT, will come through with a dividend raise in the next couple of weeks. It doesn’t have as long of a track record as some others on the list, so it is a bit more difficult to predict if/when the announcement will come.
One way or the other, I will make an overall update on my predictions when Chatham declares its dividend, and see how the final tally comes in on the scorecard.
Overall I’m happy with how the quarter is going and am all smiles about the raises, as I get to see my dividend income growth continue its ascent higher.
To see how my dividend income has been progressing, please check out the quarterly updates on my DGI Portfolio page.