The third quarter is in the rear-view mirror and we are now heading down the home stretch for the year. And just when I thought that 2020 couldn’t possibly get any crazier, October started with President Trump and other members of his family and staff testing positive for coronavirus.

My family has been impacted as well in recent weeks, with my wife and I both testing positive at the start of the month. It’s been a slow recovery, but we are thankful that we are improving daily and seem to have avoided the worst of what the disease has to offer.

Our quarantine just happened to fall during my daughter and wife’s birthdays, as well as our tenth wedding anniversary. Not quite what we’d envisioned for the special days, but we were blessed to be able to spend the time together. Just another string of events that will always be in our memories with the pandemic.

I doubt this is the last of the October surprises we see, the next few weeks until election day are going to be ones for the history books. However, I suspect the stock market will continue shaking off whatever is thrown at it, just as it did throughout the third quarter.

The three major indices all saw gains during Q3, with the NASDAQ leading the way with a gain of nearly 10%.

My portfolio performed similarly, as it gained about 7.5% in value during the quarter and now sits with a 5.5% gain for the year. That’s remarkable to me considering all the volatility in the markets and the economy.

September Dividend Income

The last month of the quarter is always my highest income month, and September was another good one for the portfolio. I once again hit my double-digit income growth goal, with 11.8% annual growth compared to 2019. This was driven by a combination of dividend increases, dividend reinvestment that added share count, and the effects of trades made during the last year.

Here are the results broken down by ticker:

There’s been a lot going on in the portfolio in the last year, with multiple trades either adding to or liquidating positions.

Ross Stores and Wells Fargo were both sold after they suspended dividends, while IBM and Gilead Sciences were sold due to poor performance and slowing dividend growth. Dominion Energy was trimmed in size after it announced a dividend cut, and Microsoft and Digital Realty were trimmed in an effort to take capital gains and rebalance the portfolio.

Meanwhile, Broadcom was added to the portfolio to replace IBM, and add-on buys were made in Chevron, Flowers Foods, Johnson & Johnson, 3M Company, NextEra Energy, UnitedHealth Group, and Exxon Mobil.

There were several companies with double-digit income growth that came entirely from dividend reinvestment and higher payouts. Visa led the way with a 20.9% increase, while Amgen (13.5%), American Water Works (11.7%), Home Depot (13.2%), Lockheed Martin (11.8%), McDonald’s (10.7%) all produced solid numbers.

Some of the laggards were Becton Dickinson (4.0%), which continues to favor paying down debt over growing dividends, while Cummins (3.3%), Norfolk Southern (2.2%), and Union Pacific (2.4%) all saw slower growth on a weak economy.

September Dividend Increase Announcements

We are now entering the final quarter of the year, so the pace of dividend increase announcements are starting to pick up.

September produced an early announcement from Starbucks, while McDonald’s held out until October to announce its increase.

My predictions were generally close, with some coming higher and some lower than what I expected.

Philip Morris $PM raised by $0.03 rather than my prediction of a penny, so it was nice to see management showing confidence in cash flows in bringing the higher number. With a yield over 6%, that 2.56% raise is definitely something I’ll take.

Microsoft $MSFT came in a penny lower than my estimate, as management decided to play things conservatively. Still, a near 10% boost is welcome, and was the biggest increase seen in the portfolio this month.

Lockheed Martin $LMT announced a $0.20 raise, just as I’d expected. It seems to be happy keeping the payout moving in $0.20 intervals, which is fine with me. I’ll take 8.3% growth on a high-2% yield any day.

For McDonald’s $MCD I was expecting anywhere from a penny to a nickel raise, so the four-cent increase to $1.29 was reasonable. Earnings for the company are taking a hit with COVID, so to get any raise at all is welcome.

The big surprise came from Starbucks $SBUX, which announced its increase a month earlier than it typically does, and did so with a a near double-digit increase. Starbucks earnings are currently expected to drop by 67% in 2020, so I really wasn’t expecting much at all of a raise.

For the company to announce early, and announce a 9.8% increase to boot, really speaks to the importance it places on the dividend for shareholder returns. It’s only been paying a dividend for ten years, but there aren’t many with better track records in the sector.

Upcoming Dividend Increase Announcements

With Starbucks jumping the gun with its announcement, and Cummins coming out with a 3% increase before I got this article published, Visa and AbbVie are the only other companies that I expect to announce raises.

Cummins $CMI announced a 3% raise on October 13th, making it fifteen consecutive years of dividend growth. Like many companies in the industrial sector, its earnings have been hit by the pandemic, with current estimates calling for a 37% drop in EPS in 2020.

Between the dividend raise and drop in earnings the payout ratio is now up to 56% versus a typical 30-40% payout seen in recent years. EPS is expected to increase by 20%+ in 2021 and 2022, so I’m hopeful that it can get back on the path of higher growth again.

Visa $V is also expected to see a small decline in earnings this year, but with a much lower payout ratio, I’m thinking it will still announce a healthy raise. It hasn’t posted an increase of less than 15% since instituting the dividend, and with a payout ratio of just 24% I think it will continue that streak.

My prediction is that Visa will raise the payout from $0.30 to $0.35, an increase of 16.7%. This keeps the payout below 30% and keeps the streak of 15%+ growth intact. With analysts expecting 17% earnings growth in 2021 and 20% in 2022, that streak could continue on for the years ahead.

AbbVie $ABBV is the rare company that offers both a high yield and high dividend growth. The market has discounted the company for years on fears of the future patent cliff for Humira, yet it keeps finding ways to keep growing earnings and the dividend.

It has more than doubled the dividend since 2015, and while it sports a yield of 5.5%, its payout ratio is on the low end of guidance at ~45%.

Analysts are expecting 17% EPS growth in both 2020 and 2021, so I think we will see another double-digit dividend boost. My prediction is that AbbVie raises the dividend from $1.18 to $1.30, an increase of 10.2%. This would push the yield just over the 6% mark and produce a payout ratio of 50% of earnings, right in line with management guidance.

Recent Dividend Growth Articles

Between COVID and work, my writing has taken a hit in the last several weeks, as this will be my first article published since last month‘s digest.

Not only has my writing suffered, but I seem to be having a difficult time keeping up on my reading as well, so the list will be short this month.

I am happy to be included again in Dividend Diplomats’ monthly update on the dividend income collected by their list of 53 bloggers. All told, there was over $31,000 collected.

My $201 didn’t do much to move the needle, but I am honored to be included with so many other quality investors. Reading other’s stories is a great way to stay motivated and encouraged while on my journey. We all start from zero, so it’s fun to see the progress that can be made over time.

Another interesting read was David Van Knapp’s first article in what will become a series covering the highest quality dividend growth stocks in the market. This month’s stock is Apple $AAPL, and I’d have a hard time arguing against that pick. It is in a class of its own when it comes to financial power and strength of a brand.

I also enjoyed David’s recent article on Seeking Alpha, where he presented his rating system for the most defensive stocks in the market. He provides a ton of useful data on many popular stocks, and with some people’s concerns about a potential drop in the market, now may be a good time to consider some of the names on the list.

Closing Thoughts

The weather is finally starting to feel like fall as we are forecast to have temperatures in the 20’s next week, and we now are just ten weeks away from the end of the year. March and April seemed to drag on forever, and now in a blink of an eye the year is nearly over.

It will be interesting to see how the market reacts to the upcoming election. Stocks have continued to climb a wall of worry in what’s been a seemingly hated bull market. Like others, I’ve long expected a crash, but the full force of the Fed seems to be keeping things afloat.

The portfolio is well on pace to meet my goals of double-digit income growth, which is comforting to know during uncertain times. Market crash or not, the dividends will continue to get paid and grow in size.

Best wishes and happy investing!