One telltale sign of a quality investment is its ability to not just pay dividends but to raise them on a regular basis. A company that can raise its dividend regularly has demonstrated its ability to grow its sales and profits over the long run. These companies often operate stable businesses in which they have developed their own market niches, and this often (but not always!) makes them compelling stoks to buy, especially on weakness.
However, before considering serial dividend raiser you should first make sure you understand where the company is getting the money to pay its dividends and how much of its profits it pays out in the form of dividends. Oftentimes we see companies raise dividends even when it cannot afford to do so, and we can also see companies borrow money or even issue shares in order to pay dividends. These dividends are often unsustainable in the long run, and so you need to take precautions.
In order to avoid these pitfalls, simply answer the above two questions to your satisfaction. Also make sure that a company’s dividends aren’t too big with respect to its profits unless it is required to make large payments by law in exchange for tax advantages (e.g. REITs and LPs.)
With this in mind, I think investors should look at the following companies as candidates for your income portfolio. Both consistently raise dividends, and have done so recently. Furthermore, it can afford to keep raising them.
1. Norfolk Southern (NYSE:NSC)
Norfolk Southern recently raised its quarterly dividend to $0.57/share from $0.54/share, and this is the second dividend increase in the past 12 months. Norfolk Southern operates in a great industry: rail transport. The rail transport companies operate as a de facto oligopoly, which means it has very little competition and pricing power. Furthermore, it has been taking business from trucking companies thanks to the rise of intermodal transport as well as the fact that rail transport is far more efficient than truck transport, especially in a high gas price environment.
As a result, Norfolk Southern has been steadily raising its dividend, and it is positioned to continue to do so as it continues to generate strong cash-flow, make its business more efficient, and find new operating segments. With the stock near an all time high, I wouldn’t jump in now, but given the company’s relative stability I think it is an excellent stock to buy on weakness.
2. The J.M. Smucker Company (NYSE:SJM)
J.M. Smucker recently raised its quarterly dividend from $0.58/share to $0.64/share. The company has a long history of raising its dividend, which has more than doubled in the past 10 years. The company generates stable income through its well-known packaged food and coffee brands. While the company’s income has come down somewhat from its 2012 peak, it has kept its dividend low enough so that it can continue to raise it. Management has also been repurchasing shares aggressively as the share price has been consolidating over the past year or so, meaning that the company has further room to raise its dividend on a per-share basis.
Ultimately, the company’s near-term setback has been disconcerting to some, as is evidenced by the weak share price performance year-to-date (the stock is flat) and over the past year (the stock is down 6.2 percent.) However, when you are looking for serial dividend raisers, this is the kind of situation you are looking for. You want to invest in quality companies when it is experiencing setbacks because there is a very strong likelihood that it will bounce back. I think this is the case for J.M. Smucker, and the weakness we have seen is likely presenting long-term investors with a buying opportunity.
Disclosure: Ben Kramer-Miller has no position in any of the stocks mentioned in this article.
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