Hello again, and welcome to the March edition of Dividend Growth Digest. It’s been a wild month in the market, as volatility increased in a big way to end the month of February, turning all-time highs to record daily losses in the blink of an eye.

I long wondered how the market kept moving higher in the face of the China slowdown and outbreak of corona-virus (COVID-19), so it wasn’t much of a surprise to me when the bubble finally burst and share prices crashed at the end of the month.

The quickness and magnitude of the fall was impressive, as the indices all dropped 10%+ over the course of just six trading days. Kudos to those of you who had cash ready to go and were able to pull the trigger on some buys, as the first trading day of March was a 1,200 point gain for the DOW. That doesn’t bring us back to old highs, but it is certainly a nice relief from the string of down days.

The volatility can certainly be stressful if you let it be, but it’s times like these that again remind me of why I enjoy practicing the dividend growth investing strategy. Down days are an opportunity, not a negative, as lower shares prices mean higher yields, and more effective dividend reinvestment for my portfolio.

It also means better opportunities for new capital. Unfortunately I’m fully invested with my public account and am no longer contributing cash into it, but I do have a 401(k) account with my job, and will benefit from the dip as new funds are added.

February Portfolio Income

In dividend growth investing, the focus is on dividend income, and watching it grow over time. January got the year off to a great start, as dividend income grew by 27.1% over 2019’s total. Unfortunately, February was a small step back, as income dipped by 4.1% compared with last year.

The loss in income in February was related to the increase in income in January, which was caused by a few trades made in the last year.

Apple, along with Microsoft, was trimmed back in November to provide funds for add-on purchases of UnitedHealth Group, Automatic Data Processing, and Johnson & Johnson.

Omega Healthcare Investors was trimmed, and General Mills and Tanger Factory Outlet Centers were sold last February to provide funds for the purchase of Altria Group, Dominion Energy, and others.

The drop in income from those four positions was enough to offset the gain in income from the other stocks that pay in February. A good reminder to me that tinkering with the portfolio too much can hurt short-term results. Hopefully the moves pay off with future growth to make up for it.

Not all was bad for the quarter however, as eight of the stocks grew income by double-digit percentages. The biggest increase from Kinder Morgan Inc., which saw income rise by 31.1% year-over-year on the back of a 25% dividend increase and dividend reinvestment gains. AbbVie also had a nice year, growing income by 16.5%. This was an impactful increase, as its $24.93 payout was the third highest payout for the month.

CVS and STAG Industrial were the laggards, with income growth of just 3.4% and 5.7%. CVS is paying down debt following the Aetna acquisition, so it will likely be another year or so before we see an dividend increase from them. STAG is also working to lower its payout ratio, so I’m hopeful that income growth will pick up there in another year or two as well.

February Dividend Increase Announcements

With seven dividend increases during the month, February turned out to be an excellent month for new announcements in the portfolio. The announcements from 3M Company $MMM, NextEra Energy $NEE, Xcel Energy $XEL, Digital Realty Trust $DLR, and Home Depot $HD were all expected, but I also received some nice surprises from the likes of Wastco Inc. $WSO and EOG Resources Inc. $EOG.

Overall, the average sequential increase came to 10.8%, while the average YOY increase was 16.52%. This is impressive considering those double-digit boosts are coming from companies that have an average yield of over 3%.

The small 2% increase from 3M was expected, as its EPS declined by 11% in 2019, putting the payout ratio at an uncomfortable 65% of earnings.

The smaller increase for Digital Realty was also expected, considering it saw AFFO fall by 2% in 2019, and analysts are projecting little growth for 2020 as well.

NextEra and Xcel came in right where I predicted, and the two remain some of the better performing stocks in my portfolio. I think NextEra could produce a few more years of double-digit dividend growth, as its payout ratio remains below 60%, and earnings are expected to grow at ~8% going forward. Xcel too should be able to continue with similar growth, and I expect 5-7% annual income growth going forward.

Home Depot announced a bigger increase than I expected, considering I was looking for low single-digits. The fact that management was willing to put out a 10.3% increase was quite impressive, and shows its commitment to paying a strong dividend.

Watsco too showed its commitment for a strong dividend, as the company chose to raise the payout by nearly 11% despite flat earnings growth in 2019 and just 4% income growth expected in 2020.

Finally, EOG Resources showed why it’s one of my favorite companies in the oil & gas sector. The company has showed a commitment to returning more cash to shareholders, and is doing so without increasing debt on the balance sheet. EOG is in the best shale basins in the country and is usually the lowest cost operator among competitors. I find it quite impressive that the company continues to grow production and shareholder returns despite the current low crude price environment.

Upcoming Dividend Increases

I wasn’t quite able to get this article out quick enough this month, as Ross Stores $ROST beat me to the punch and announced its dividend increase earlier today. It was another double-digit boost, as the payout was raised by 11.8%, from $0.255 to $0.285.

You won’t find many companies with better growth track records than Ross Stores. The company’s grown the dividend at more than 10% per year, ever year, for the last two-plus decades.

This growth has provided tremendous returns for investors, turning a $1,000 investment made at the beginning of 2000 into over $58,000 today, compared with just $2,904 had that been same amount been invested in the S&P 500.

I haven’t owned it for that long, but you’ll hear no complaints from me about its performance. I’ve owned Ross Stores for nearly seven years, and its grown in size from an initial investment of $486.15 to $1,848.02 today, a gain of 280%. It rarely yields over 1%, but the growth is starting to snowball, and my yield on cost is now nearly 4%.

What a great company!

Looking ahead at the rest of March, the only other company on my watch list with consistent increases is Realty Income. However, the March increases are generally small, with most only around 0.2%. All increases are nice, but I’m not going to hold my breath waiting for that one.

One other company I’ll be watching closely though is Qualcomm $QCOM, which announced dividend increases every March up until 2018. It’s now been two years since the last increase, so a return to growth would be a welcome development. Analysts are currently expecting 18% EPS growth in 2020 and 45% in 2021, so maybe this is the quarter that management gets the dividend moving again.

Recent Articles

I haven’t published any new content in the last month, but that doesn’t mean I haven’t been productive. I managed to get my utility stock spreadsheet updated again, and have posted the new info on the utility watch list page of the site. The recent pullback in the market has finally brought share prices in the sector closer to fair value, making them a bit more attractive with the current market volatility.

In related content from others, I really enjoyed DoctoRx‘s article on Seeking Alpha covering the utility sector. He made the case that utilities are attractive as a bond substitute, and that lower rates will keep investors interested in the sector.

Utilities: Making The Case That Their Rally Has More Juice Left

Another article I found interesting was Justin Law‘s highlighting of The Fastest Growing Dividends of the Decade. I found his list quite interesting, and considering that I own three of his top ten, and another four of his nine honorable mentions, it appears I have growth pretty well covered with my portfolio.

The final article to note comes from Chuck Carnevale, who shared his thoughts on portfolio volatility, and how to keep your mind right when the market turns bearish.

How To Protect Your Dividend Growth Portfolio From The Pending Market Crash

I thought it would be a good article to share with others as we endure the recent market volatility.

Closing Thoughts

The end of February and beginning of March have turned into a roller-coaster ride in the markets. The 1,000 point moves are becoming commonplace, which is beginning to remind me of the huge moves seen during the Great Recession of ’08/’09.

Times like these make me thankful of the dividend growth strategy, as I now welcome down days, as that just means lower prices and higher yields for the stocks I want to own. Recent dividend increases in the portfolio also provide encouragement, as they display management’s confidence that the world isn’t ending, and they expect growth to continue in their business.

I hope this update finds you well, and wish you happy investing!