My favorite part of dividend growth investing is declaration day, the day when a new dividend rate is announced by one of the companies I own. People generally get one raise per year at work, but with a portfolio of 53 stocks, I average better than one income increase a week!
I keep a log of all the dividend growth announcements made by companies held in my portfolio going back to the beginning of 2013. By doing so I am able to see when each company announces their new dividend rates, and decide if there is a trend on when those new rates are declared.
October brings five companies to my attention who are likely to announce higher dividends. I will look at each of those stocks below, and give the reasoning behind my predictions for the new dividend rates.
September Dividend Growth Results
In early September, I presented my dividend growth predictions for Philip Morris International Inc. $PM, Microsoft Corp. $MSFT, McDonald’s Corp. $MCD, and Lockheed Martin Corp. $LMT.
Each of those four companies have now announced their new dividend rates; this is how those predictions played out.
It was good news across the board, as the dividend increases all came in higher than my predictions. The average increase was 6.98%; well above my prediction of 4.73% growth.
Lockheed Martin led the way, as it announced a nearly 10% increase to $2.00; eight cents higher than my prediction. I am encouraged by the nearly double-digit increase, as I think it helps validate the current analysts’ estimate of $14.27 in earnings for 2018.
The $8 annual payout is 56% of 2018 estimates, so it seems that Lockheed Martin is willing to keep the payout ratio around the mid-50% level going forward.
Philip Morris had the smallest increase at 2.88%, as it works the payout ratio back down to more normal historical levels. Still, the announced dividend was a penny higher than my prediction, so it’s nice to see the company staying aggressive with the payout.
Microsoft’s 7.7% increase was a nice surprise as well, and was an encouraging sign that the company sees the dividend as a high priority. The $1.68 annual payout is 53% of expected 2018 EPS of $3.19, which is a higher payout ratio than the company has historically paid.
However, with long-term EPS growth of 9.4% expected, my guess is that the company will work back towards a 50% payout ratio over the next couple of years.
McDonald’s also went a penny higher than my guess, as it announced a 7.45% increase. This was the biggest increase since 2013, and is a 58% payout ratio based on 2018 EPS estimates of $6.98.
Looking back at the historical payout ratio’s, that 50-55% level looks like the sweet spot for payout ratio. With analysts expecting high single-digit EPS growth over the next 5 years, I think dividend growth could be headed higher going forward as well.
Expected October Increases
With the September announcements out-of-the-way, let’s now look forward to the upcoming dividend increases.
I scanned my list of announcements and identified these five companies that have shown a history of October dividend increases:
As we can see from the list, Thor Industries, Inc. $THO typically announces during the first week of October; Visa Inc. $V announces the third week; and AbbVie Inc. $ABBV, Starbucks Corp. $SBUX, and STAG Industrial Inc. $STAG all announce the last week of the month.
Another noticeable trend is that with the exception of STAG Industrial, these companies are some dividend growth powerhouses.
Every announcement made by Thor, Visa, Starbucks, and AbbVie in the last three years has been a double-digit increase, with several of those over 20%.
This has been a trend over their relatively short histories. Here are their longer term growth rates, as collected from David Fish’s U.S. Dividend Champions list:
The growth rates are impressive across the board, as each company has produced 20%+ annual dividend growth over the last five years.
In the case of STAG, that historical number is a bit deceptive, as much of that growth rate came from a big increase in the first year following its IPO. That number has come down considerably with recent announcements, and will likely stay in the single-digits going forward.
Let’s now see where the dividends are headed going forward!
October Dividend Growth Predictions
However, there has been some guidance from Visa, Starbucks, and STAG in regards to payout ratio targets, so that does help a bit in making my predictions.
Here are my takes on the five companies:
AbbVie Inc. $ABBV has been a tremendous dividend growth stock since it was spun off from Abbott Labs $ABT in late 2012. It has carried the long tradition of shareholder friendliness from its parent, and made the dividend a high priority as part of its shareholder return plan.
The company quickly moved the payout ratio up to the ~50% level, and has maintained a 45-50% ratio in recent years. The current $2.56 annual dividend is a 46.5% payout of the estimated $5.51 in 2017 earnings, and I see a similar payout ratio going forward.
Analysts are expecting 19% EPS growth to $6.56 in 2018, which bodes well for another big dividend increase announcement later this month.
I am predicting a 17.2% increase in the dividend to $0.75 ($3.00 annualized), which would be a 45.7% payout ratio. This rate would be lower than in recent years, but a still generous increase for investors.
I still have concerns that Humira is such a huge part of AbbVie’s sales, but with a near 3% yield, and mid-teens growth expected over the coming years, AbbVie remains my top dividend growth pick in the health care sector.
Starbucks Corp. $SBUX has been a tremendous stock, providing shareholders with a nearly 26% annualized return over the last decade, turning a $10,000 investment into nearly $80,00.
During that time it has also transitioned from a pure growth stock to a dividend growth stock. It instituted a dividend in late 2010 and has aggressively grown the payment as it expanded the payout ratio on top of its high EPS growth rate.
Executive Scott Harlan Maw highlighted this on the Starbucks’ Q3 Conference Call.
We have significantly increased our capital returns to shareholders over the past five years with buybacks up from roughly zero in 2009 to $1.2 billion this year to date in 2017. Going forward, we will continue to accelerate cash return to shareholders, and as we announced in Investor Day, to increase our dividend payout range to 40% to 50%.
Starbucks’ current annual dividend of $1.00 is already at 48.5% of expected 2017 earnings of $2.06, which puts it on the high-end of the targeted payout range. EPS estimates for 2018 are at $2.35, which is 14% higher than 2017.
Considering Starbucks history of high dividend growth, I think it will be generous once again and give a 16% increase in the dividend to $0.29. This would be a 49.4% payout ratio, and would bump the dividend yield over the 2% mark.
I believe this would be the first time in Starbucks’ history with a yield over 2%, and with expectations of continued double-digit growth in its future, this seems to be a decent time to buy more shares.
STAG Industrial, Inc. $STAG is a small-cap industrial REIT with a $2.6B market cap. It came public in late 2011 and has been a steady performer since then, providing 21.3% annualized returns for investors.
STAG was aggressive in growing the dividend after coming public, but management has throttled that growth back in recent years as it has worked to lower the payout ratio to a more conservative level.
STAG recently set a payout ratio target of 80% of AFFO, and is now nearing that number at 83.4% with the current dividend rate. AFFO is expected to grow by 7% in 2018, which allows STAG to give a small raise while still getting under the targeted payout ratio.
My prediction is that the board will raise the monthly dividend by 2.13% to $0.12 per share, which would give a payout ratio of 79.6% and forward yield of over 5%.
My hope is that this will be the last of the smaller raises, and that STAG will then return a dividend growth rate more in line with AFFO growth going forward.
Thor Industries Inc. $THO is the second best investment I’ve made as a dividend growth investor, and is also the first stock I wrote about on Seeking Alpha. So it’s no surprise that the recreational vehicle “RV” maker holds a special place in my portfolio.
The company took a big hit in the “Great Recession”, but otherwise has been an outstanding performer over the years. Earnings took a 76% drop in 2009, but Thor still managed to produce annual EPS growth of 14.7% over the last decade despite it.
That growth has accelerated of late, with 32% growth in 2016 and 41% in 2017, driven by growing demand for its products and some opportunistic bolt-on acquisitions like Jayco that have expanded its product line.
Thor took on $360 million in debt to fund that acquisition, but has been aggressive in quickly paying it down. The focus on debt reduction caused last year’s dividend increase to be relatively small at just 10%.
That small increase coupled with two years of high earnings growth has caused the payout ratio to drop from a typical 25-28% to just 18.6% at the current dividend rate.
With the big acquisition closed and debt reduction well on the way to being complete, my hope is that Thor will be aggressive in getting that payout ratio back towards higher levels.
For that reason, I am predicting a 36% boost in the dividend to $0.45, which would bring the payout ratio up to 22.1% of expected 2018 EPS of $8.16. This would give a nice boost for shareholders, yet still keep the payout below recent levels, and allow the pay-off of the rest of the debt facility.
Digital payments leader Visa Inc. $V is the last company on the list.
Visa is another fast grower, producing 21.1% annualized growth over the last decade. It is also a consistent performer, having just one year (2016) with less than 10% earnings growth.
That earnings growth has translated into even more impressive dividend growth, as Visa increased the dividend at a 28.4% annualized rate over the last 5 years, moving the payout ratio up from ~15% to ~20% during that time.
In Visa’s 2017 Investor Day Presentation, the company guided for a 20-25% payout ratio, so it seems that the strong dividend increases will continue.
Visa is also working through an acquisition, as it completed its 2015 agreement to acquire Visa Europe in June of last year. With the synergies of that deal now starting to take effect, I think the increased capital returns to investors are just beginning.
My prediction is that Visa will move the dividend up to $0.21, an increase of 27.3% from its current $0.17 payout. This would be an aggressive move, but brings the payout ratio up to just 21% of expected 2018 earnings, allowing for a stepped increase towards the high end of guidance.
Even with the increase, the dividend yield remains under 1%, keeping some dividend growth investors away from the stock. However, for those looking to juice capital gains in their portfolios, I think Visa is an excellent long-term buy and hold investment to make, even at today’s elevated share price.
Summary Of Predicted Increases
Here is the final tally of my predictions for October.
It wasn’t my intent when starting this article, but I would have a tough time finding better dividend growth opportunities in the market than this handful of companies. Even when factoring in STAG’s small expected increase, the average of the five comes to 19.8%.
If these predictions come to fruition, there should be some very happy shareholders of these stocks. I’m always excited about upcoming increases, but will have a little extra anticipation in October.
October looks to be another exiting month in the DGI For The DIY portfolio, as several of the higher growth holdings are likely to raise dividends.
While the yields from some of the companies aren’t all that impressive, the high growth rates that go with them adds up over time, creating not only dividend income, but substantial capital appreciation as well.
The companies listed have already been some of the best performers in my portfolio, and I expect them to continue being so into the future.