Dividend Growth Digest: September 2020

September is here, and for many reasons it is my favorite time of the year. It is a time for kids returning to school, baseball pennant chases, the start of the NFL season, enjoyment in a bountiful garden harvest, cool evenings bringing fresh air into open windows, and most important of all, my birthday!

It’s also the start of the fall monarch migration, which brings a wave of butterflies through my home state as they head to Mexico for the winter. I’m not sure exactly why this comes to mind as I’m writing this article, but this is an event that has always fascinated and encouraged me.

Such small and fragile creatures making a two or three thousand miles-long trip across the continent seems to be a miraculous endeavor, and I suppose it provides some hope during our own difficult times. It can be easy to get discouraged when struggling against what life has to offer, be it a pandemic, forest fires, social inequality, a divisive election cycle, social distancing, job loss, or hurricanes. But if a tiny butterfly can fly 3,000 miles against wind, rain, and predator, surely we can persevere against whatever struggles stand in our way as well.

August Dividend Income

It’s been an up and down year on the income front in 2020, as several dividend cuts and some re-balancing of positions has caused lumpiness in dividend income. June was an excellent month, with dividend income rising by 26.7%, while July was a much smaller 4.5% increase.

August saw a 5.5% dip in income compared with 2019, which was a similar drop to the 4.1% seen during February.

The biggest income hit came from Cracker Barrel $CBRL, which was sold after it suspended its dividend in March. The drop was significant because the company also paid a special dividend in August of 2019, which added $25.42 to last year’s total. Removing that special payment from the equation would have resulted in a 5.5% gain in income rather than a 5.5% loss.

Other income drops came from my trimming of shares in Apple $AAPL and Abbot Laboratories $ABT and liquidation of the last of my Tanger Factory Outlet Centers $SKT.

Lowe’s Companies $LOW and CVS Health $CVS have not announced dividend raises in the last year, so their small income increase came solely from the the reinvestment of dividends.

Some brights spots were AbbVie $ABBV, Ameriprise Financial $AMP, Hormel Foods $HRL, Mastercard $MA, and Starbucks Corp. $SBUX, as they all provided double-digit income growth. Kinder Morgan $KMI did as well, and it was bolstered further by an add-on purchase during the year.

I’ll also point out the mid single-digit growth from the likes of Realty Income $O, Omega Healthcare Investors $OHI, Stag Industrial $STAG, and AT&T $T, as dividend reinvestment works its magic to grow income despite low single-digit or nonexistent dividend growth from those companies.

August Dividend Increase Announcements

August was a very slow month for new dividend increases, as Lowe’s was the only company to announce a higher payout during the month.

Date	Company	Ticker	Prev. Payout Rate	New Payout Rate	Seq. Increase	Year Ago Payout Rate	YoY Inc.	Fwd. Yield	Link
08/21/20	Lowe`s Companies Inc	LOW	$0.55	$0.60	9.09%	$0.55	9.09%	1.48%	LINK

The increase was good to see, as Lowe’s was actually a quarter late in announcing an increase since it typically announces its increase in June.

And while the increase was a solid 9.09%, it was actually pretty conservative considering the earnings growth that Lowe’s is experiencing in 2020.

Analysts are currently projecting EPS of $8.50 in 2020, which would be 49% growth over last year. This provides a payout ratio of just 28% following the dividend increase, which is well below the 35% target previously set by management.

I suspect management is being cautious due to uncertainty on the future economy. With it becoming less likely that there will be another round of stimulus checks, perhaps they are seeing this big boost in earnings as temporary in nature and want to provide some cushion for 2021 if things normalize or turn south on an even weaker economy.

On the other hand, if profitability remains high, investors could be looking at another 20%+ boost in the dividend in the coming quarters to get the payout ratio back up to the target level.

Either way, I see Lowe’s as one of the better stocks to own in the discretionary sector, even after its recent run-up in price.

Upcoming Dividend Increases

Following some slower months in July and August, the pace of dividend increase announcements should pick up in September. I have four companies in my portfolio that typically announce raises in September, and while I’m confident that we’ll see substantial raises from two of them, the other two I’m not so sure of.

First, the laggards.

Philip Morris International $PM typically announces its increase around the 15th of the month, and I’m expecting an increase again this year. However, I don’t think we will be seeing much of a raise this time around.

Last year’s increase was just 2.6%, and with earnings expected to fall slightly in 2020, there isn’t much room to raise the payout ratio any higher.  The company is already paying out nearly 93% of earnings in dividends, which is well above its typical rate. My guess is that Philip Morris will announce a token penny increase to keep the growth streak going. With a yield near 6%, anything more than that would be icing on the cake.

Update: Philip Morris announced its new dividend rate on September 9th, raising the payout by 2.6% to $1.20. Better than I expected!

McDonald’s $MCD usually announces its new dividend around the 21st of the month, and they’ve been good increases the last few years. The company announced a 7.8% increase last year, 14.9% in 2018, and 7.5% in 2017.

However, with COVID-19 causing a hit in sales, McDonald’s earnings are expected to drop by 25% in 2020, pushing the payout ratio well above historical levels. As such, I am expecting a smaller increase this year, and am predicting a penny on the low end to a 4% raise to $1.30 on the high end.

Next up is Microsoft Corp. $MSFT, which typically announces its dividend raise around the 18th of the month. Microsoft has been a very steady grower of the dividend over the years, with increases ranging from 8-11% over the last four years.

It’s done so while lowering the payout ratio from 52% to 35%, which is now the lowest it’s been since 2013.

With 21% EPS growth in FY2020 and low-teens growth expected this year and going forward, I’m hopeful that Microsoft will reward shareholders and produce another double-digit increase this year. My prediction is an 11.8% increase to $0.57, which would be a ~35% payout ratio on current FY21 estimates.

The final stock on my list is Lockheed Martin Corp. $LMT, a company that has been one of the best performers in my portfolio since it was purchased in 2013. It typically announces around the 25th of the month, so it will likely be the last on the list to announce this month.

Like Microsoft, Lockheed has been very consistent, with 9%+ dividend growth every year since 2003. I’m hopeful it will continue that trend again this year, but wouldn’t be surprised if it stuck with the $0.20 raise it’s been giving in recent years, which would be an increase of 8.3%.

Recent Dividend Growth Articles

I had a quiet month for writing, with my only piece on Seeking Alpha being my Q2 portfolio update. It was another positive update, as quarterly portfolio income rose by 19.2% over last year’s total. It was also a busy quarter, with four groups of trades made as I navigated a few dividend cuts and took some profits on some companies that saw big surges in share price.

DGI For The DIY: Q2 2020 Dividend Portfolio Update

Time will tell if the trades are successful on a capital gains basis, but for certain they’ve worked on an income basis, as I am well on track to exceed the 10% annual dividend income growth goal for the portfolio. I’ve been much less active with trades in Q3, and am hopeful that it stays that way through the end of the year.

In what was an exciting moment personally, Dividend Diplomats included me in their monthly update on dividend income earned by the blogging community.

Dividend Income From YOU The Bloggers – July 2020

My $148.85 doesn’t do much to move the needle on the $35K total, but this collection of results is a great reminder of how income grows over time. We are all on different points of our journeys, but the important thing is to focus is on the process and keep the snowball rolling.

Thanks again to Lanny and Bert for including me in the update, I am humbled to be a part of the list!

Some other interesting reads I came across were from Dividend Growth Investor, the first of which was a nice piece about Anne Scheiber and her long-term success in investing.

How Anne Scheiber Made $22 Million Investing In Dividend Growth Stocks

Anne was an IRS auditor who retired in 1944 at the age of 51 and died at the age of 101 with a portfolio of dividend stocks worth over $22 million. She showed how one can become very rich despite a limited salary by investing in high quality companies and holding them forever.

In the article, Dividend Growth Investor provides his ten lessons learned from her success, and how current investors can use them to build their own wealth today.

The other article of his that I enjoyed was a recent post on Peter Lynch, the legendary investor who ran Fidelity’s Magellan Fund from 1977 to 1990, putting up 29% annualized returns along the way.

Peter Lynch on Dividend Growth Investing

My favorite quote from the article:

“The reason that stocks do better than bonds is not hard to fathom.

As companies grow larger and more profitable, their shareholders share in the increased profits. The dividend are raised. The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row…Whereas companies routinely reward their shareholders with higher dividends, no company in the history of finance, going back as far as the Medicis, has rewarded its bondholders by raising the interest rate on a bond.”

Dividend Growth Investor has been a high-quality author covering the strategy for many years. He’s well worth a read for those who are new to DGI and wanting to learn more about it.

Closing Thoughts

With schools starting, professional sports back on television, and some states loosening restrictions allowing restaurants and bars to reopen it seems as though we may be transitioning somewhat back towards “normal” from where we were with the pandemic. My portfolio has suffered through several dividend cuts from companies impacted by COVID-19, but with a few trades I was able to overcome the losses and remain on pace for another double-digit year of income growth.

September closes out the third quarter and begins the time where dividend increase announcements start to pick up going into the end of the year. I look forward to seeing what Microsoft and Lockheed Martin offer shareholders, and hope some others too can come through with some nice announcements.

Are they any other increases you are anticipating? Let me know in the comments below.

Best wishes, and Happy Investing!