This is still a good environment in which to be a dividend investor. Strong cash balances, low capital costs, and continued unwillingness on the part of large corporations to make bold new investments makes rising dividends a reality in a slow-growth environment.
Top Companies Continuing to Increase Dividends
Countless brand-name corporations have been increasing their dividends over the last several years. And total returns with dividends reinvested provided stellar returns.
If you had purchased Duke Energy Corporation (DUK) stocks in mid-2011, for example, your simple return to date would have been somewhere around 50%. With dividends automatically reinvested during this period, that total return jumps to approximately 80%.
Union Pacific Corporation (UNP), a company with an excellent track record of increasing dividends, recently effected a 10% increase to its quarterly dividend, payable March 30 to shareholders of record on February 27.
Per share, Union Pacific’s quarterly dividend will now be $0.55. In 2012, it was $0.30 (accounting for a share split).
Who Should Consider Investing in Dividend-Paying Stocks?
Since the financial crisis, institutional investors have been buying earnings safety and dividends. It’s a trend that I believe has staying power in a slow-growth world with low interest rates.
As part of the portfolio-making process, I feel that even aggressive investors should consider having some dividend-paying blue chips. These stocks have proven to be excellent wealth creators, the fundamentals for rising dividends are positive, and dividend reinvestment is a wealth accelerator for those with a medium- to long-term time horizon.
Companies that we’ve considered previously that fall into this category are businesses like 3M Company (MMM), PepsiCo, Inc. (PEP), NIKE, Inc. (NKE), Johnson & Johnson (JNJ), Union Pacific, Microsoft Corporation (MSFT), and Kinder Morgan, Inc. (KMI) to name a few.
These might be boring names to some, but they are powerhouse dividend-payers. These types of stocks, combined with faster-growing businesses, can help with portfolio diversification and the reduction of overall investment risk.
Dividend-Paying Stocks the Best Investment Opportunity in This Slow-Growth Market?
This year has not started out well for the stock market and sentiment has been hurt by oil prices, sovereign debt problems in the eurozone, and economic data from China—all the more reason to re-evaluate portfolios for risk. (See “Should Investors Focus on Individual Stocks in 2015?”)
It’s possible that we’re at the beginning of a new business cycle, but that doesn’t mean the stock market will go up near-term. It’s already done so in anticipation, which means that dividend income may be the only gains we’ll get for a while.
Companies, along with consumers, tightened their belts after the financial crisis and subsequent recession. Keeping shareholders happy with dividends, special one-time payouts, and common share repurchases is still in the cards.
With organic comparable sales growth a difficult thing to achieve these days, it’s much easier for corporations to squeeze productivity and return excess cash to shareholders, as opposed to making bold new capital expenditures.
Other examples of what may be solid bets for rising dividends include Colgate-Palmolive Company (CL), The Southern Company, (SO), The Clorox Company (CLX), and Abbott Laboratories (ABT).
This is a market that’s already gone up with little in the way of value. On a major price correction, risk-adjusted expectations for dividend-paying stocks stand out.