Over the past year, inflation has been on the increase. A popular meme on the internet is the saying that if you didn’t receive an 8.60% increase in your income, you essentially received a pay cut. This is very relevant for those who are still earning salary, and even more relevant for those who are living off dividends.
In general, dividend income tends to grow above the rate of inflation over time. That does not mean that it grows above the rate of inflation in every single year however. There could be a lag, but over time dividends do provide protection against inflation. This is true for a diversified portfolio of stocks of course. Some companies grow dividends above the rate of inflation, while others closely match it; a third group grows dividends at a slower rate.
This is where it is important to build a portfolio that includes the three groups of dividend growth stocks:
- High dividend growth with a lower dividend yield
- Companies that are in the sweet spot in terms of dividend yield and dividend growth
- High yielding companies with a slower pace of dividend growth
Dividend Income Growth
The most important thing of course is to make sure that the economic engine of each company is constructed well, so that the company can keep growing revenues and earnings throughout the ups and downs of the economic cycle. A company that can successful pass cost increases to its customers is worth its weight in gold. Rising earnings per share can help in growing the dividend income, which in turn means that your dividend income can maintain purchasing power.
Over the past week, there were several companies that raised dividends to shareholders. I isolated the ones that have managed to grow dividends for at least a decade. You can observe how the highest yielding companies grew dividends at a very slow rate, albeit this is consistent with what they had done in the preceding 5 or 10 years. You can also observe that the companies that yield a little less are able to grow dividends at the rate of or faster than inflation.
While this is an isolated sample of just a weeks worth of dividend increases from the universe of dividend growth stocks, it is still good to illustrate the point I am making.
Caterpillar Inc. (NYSE:CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide.
Caterpillar increased its quarterly dividend by 8.10% to $1.20/share. Caterpillar has paid higher annual dividends to shareholders for 28 consecutive years and is a member of the S&P 500 Dividend Aristocrat Index. Over the past decade, the company has managed to boost dividends at an annualized rate of 9%.
The stock sells for 18 times forward earnings and offers a dividend yield of 2.15%.
Target Corporation (NYSE:TGT) operates as a general merchandise retailer in the United States.
The company increased its quarterly dividend by 20% to $1.08/share. This is the 51st consecutive year in which Target has increased its annual dividend. Over the past decade, this dividend king managed to grow annualized distributions by 11.10%/year.
This dividend king sells for 17.42 times forward earnings and yields 2.89%.
UnitedHealth Group Incorporated (NYSE:UNH) operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.
The company increased quarterly dividends by 13.80% to $1.65/share. That's the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized rate of 24.80%.
The stock sells for 22.35 times forward earnings and yields 1.36%.
Casey's General Stores, Inc., (NASDAQ:CASY) operates convenience stores under the Casey's and Casey's General Store names.
The company increased its quarterly dividend by 8.60% to $0.38/share. This was the 23rd consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized rate of 9.20%.
The stock sells for 20.83 times forward earnings and yields 0.80%.
Universal Health Realty Income Trust (NYSE:UHT) is a real estate investment trust that invests in healthcare and human service related facilities including acute care hospitals, rehabilitation hospitals, sub-acute care facilities, medical/office buildings, free-standing emergency departments and childcare centers.
The REIT increased quarterly dividends by 0.70% to $0.71/share. The new dividend is 1.42% higher than the dividend paid during the same time last year. That's the 37th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to boost dividends at an annualized rate of 1.40%.
The REIT sells for 14.50 times FFO and yields 5.34%.
Oil-Dri Corporation of America (NYSE:ODC) develops, manufactures, and markets sorbent products in the United States and internationally. It operates in two segments, Retail and Wholesale Products Group; and Business to Business Products Group.
The company increased its quarterly dividends by 3.70% to $0.28/share. This declaration marks the nineteenth consecutive year Oil-Dri has increased dividends. That was the 20th consecutive year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized rate of 4.90%.
The stock yields 4.15%.
Citizens Financial Services, Inc. (NASDAQ:CZFS) operates as the bank holding company for First Citizens Community Bank that provides various banking products and services for individual, business, governmental, and institutional customers.
The company raised its quarterly dividend by 3.20% to $0.475/share. This was the 25th year of consecutive annual dividend increases for this newly minted dividend champion. Over the past decade, the company has managed to grow dividends at an annualized rate of 6.50%/year. The five year annualized rate of dividend growth is a more modest 2.30% however.
The stock yields 2.88% and sells for 9.76 times forward earnings.
- How dividends protect income from inflation
- A Look Under the Hood For Inflation
- Types of dividend growth stocks
Article by Dividend Growth Investor