It has been more than six months since the pandemic started affecting the global economy. Many dividend paying businesses were impacted too. In response, some stopped or cut dividends. But not many businesses that I own have gone that route. I wrote a blog post in May this year on my dividend paying stock positions. At that time, out of my thirty-seven different stock positions, only four had delayed or suspended dividends. See this link for that blog post.
Fast forward six months, it is time for another update on my dividend stocks. The COVID19 pandemic is still with us and even though the economy has begun a gradual recovery, there’s still significant uncertainty over the route this recovery will take. I try to own only high-quality businesses in my portfolio so most of my holdings have not changed dividends. Though, the effect of this pandemic has been very uneven over the economy. Some business sectors have been affected much worse than others. From my portfolio, commercial real estate (CRE), travel & tourism, and other economically sensitive industries (e.g. banks) have been disproportionally impacted. Many dividend cuts have also come from these sectors of the economy.
Six months ago, I reported that four of my positions have suspended or delayed dividends. See this table. One of those companies (Sysco) resumed dividends at the previous rate after a delay of one month. The other three businesses still haven’t started paying dividends. Since then, one other company, Wells Fargo (WFC), has also joined this list. Wells was forced to cut its dividend by 80% in July by its banking regulator, the Federal Reserve. It wasn’t the only bank to reduce dividends, though. Others were affected too.
Here’s the new list of my positions that had reduced dividends so far:
There are still only four names on it—albeit Sysco is happily removed from it. It is replaced with Wells Fargo. The other two holdings, Disney (DIS) and Retail Opportunity REIT (ROIC) both recently announced they won’t reconsider dividends until 2021. I am confident that ROIC will eventually resume paying dividend. It owns grocery anchored shopping centers on the West Coast. As its retail operations begin normalizing next year, excess cash flow will resume. It is also a REIT, so by definition it will need to resume distributing any profits as they come. As for Disney, it could have paid this year’s dividends easily but chose not to do it. Disney’s board announced last month that it will reconsider dividends next year. For now, I am happy that Disney is reinvesting excess capital into its burgeoning streaming and content generation businesses. Disney is a veritable global brand. It will come out of this economic malaise even stronger. I just need to stay patient.
Next up are the stocks that bucked the trend and increased their dividends this year. Six months ago, I had seven names on this list. See this. Today, that list has doubled to fourteen positions:
This is an impressive list of businesses. They not only endured this economic downturn well but felt confident enough in their businesses to raise dividends for shareholders. And this dividend raise is not just a one-off thing. These companies have been raising dividends steadily every year. It just so happened that this year’s dividend raises came at a time when many other businesses have been struggling to just survive.
Some of these names belong to industries that have clearly benefited from this pandemic-enforced stay-at-home trend—such as technology and home entertainment. So it came as no surprise that these businesses are doing well. But the list also contains other names—from industries that have been reeling from the COVID19 shutdowns. Like consumer retail. And yet, businesses like Starbucks and McDonald’s also increased dividends in last six months.
To put this in perspective, these are 14 out of total 38 dividend-paying positions I own today. In other words, more than a third of my positions have increased dividends. I like to own durable resilient businesses that are capable of generating good profits even in times of economic hardship. These fourteen businesses exemplify that trait.
As for other businesses that didn’t increase dividends yet, I expect many of them will eventually do so. They have also been doing well. Since many of them increase dividends once every four quarters, they aren’t due yet for a raise.
Above table also shows how much did each company raise dividends by year over year. It’s important to note though that they have all been consistently raising dividends for many years. Both, in up years and down years. Take for instance, the case of United Healthcare (UNH), a preeminent medical insurer and service provider. This year, UNH raised its dividend by 15.7% and over the last five years, its dividend growth CAGR has been a whopping 20.1%. Similarly, Activision (ATVI) raised dividend by 10.8% this year but its 5-year dividend raise is even higher—at 12.1% CAGR. You will see more on five-year dividend growth rates further down in this post.
It can be tempting to pooh-pooh these annual dividend raises as immaterial to our overall returns. After all, if I am getting a 2% dividend on a stock position and then that company raises its dividend by 10%, it still amounts to just 2.2% yield for me. Going from 2% to 2.2% yield in one year won’t make me rich, or would it? To answer this, we must look beyond just the yearly dividend raise. Two factors come into play. One, how consistent is the company in raising its dividend? Two, how much new investors are willing to pay for its increased dividend? If investors believe that 2% is a reasonable dividend rate for this business, and they also believe that this newly increased dividend per share is sustainable, they will be willing to now pay more for each company share. How much more? Enough to raise its share price by 10% such that the effective dividend rate drops again to 2%. To sum up, as the company increases dividends year over year, its share price should follow suit. Even though that 10% jump in dividend rate from 2% to 2.2% may seem underwhelming, it becomes quite material when it results in a corresponding 10% increase in share price. Over time and holding all else equal.
This 1-to-1 correspondence between dividend growth CAGR and share price growth is of course tenuous at best. There are many other variables that could affect share price growth. However, in general and for businesses with steady long-term track records, consistent dividend growth inevitably results in long-term price performance for investors.
To see this in real world investing, here I share all my dividend payers, their 5-year dividend growth CAGR and corresponding share price performance over the same period. [Note that I excluded companies that have stopped paying dividends, and price performance CAGR is calculated without considering dividends.]
This list is sorted in decreasing order of dividend growth rate. It is also color mapped with darker green shades for higher growth numbers. It’s clear from the color map that higher dividend growth over the last five years have mostly resulted in higher share price increases. One can see that most of the dark green shades are clustered in the top half of the table where higher dividend growth businesses are listed. Though, there are some outliers too. I could go into each one of these individual cases and point out what other external factors affected this divergence between dividend and share growth rates. But it would take too long, so I leave that discussion for another day. Suffice it to say, investors indeed tend to reward companies that grow their dividends steadily and reliably over the years. In this vein, some that were forced to cut dividends (those sitting at the bottom of the table) have also been punished by share price drops.
I own each one of these stocks in my portfolio, though not necessarily in equal amounts. Most of them have done wonderfully well for me over the last five years, though some have been laggards. I am happy to keep them all in my portfolio. You can see my full stock portfolio here and here.