Dividends Make It Easier to Hold On

When the market isn't moving your way, those cash payments serve as an incredible reminder of what really counts.

Feb 10, 2014 at 10:11AM

The real-money Inflation-Protected Income Growth portfolio attempts to build an income stream that increases at least as fast as the rate of inflation. It does this by buying shares of companies that have a history of paying and increasing their dividends and that look like they have the potential to continue that trend.

Still, there are no guarantees in the market, and dividends can generally only be paid if a company is current on every other key financial obligation. While that makes dividends a somewhat risky proposition, it also makes a dividend an incredibly powerful signal of the true health of a company. Because a company's dividend, its coverage, and changes can tell you so much about the health of that company, they make it easier to hold a company's stock during periods of market volatility.

The difference cash makes
For instance, defense contractor Raytheon (NYSE:RTN) handed its shareholders, including the iPIG portfolio, a $0.55-per-share dividend since last week's update. Raytheon's dividend was 10% higher than the payment it made at the same time last year, but with a payout ratio of only 36% of earnings, it has room to continue raising its payments in the future. That well-covered and growing dividend from Raytheon stood in contrast to its stock price, which actually fell a bit last week.

Similarly, industrial-chemicals titan Air Products and Chemicals (NYSE:APD) is handing its shareholders a $0.71-per-share dividend this week. That dividend is a tad more than 10% higher than the dividend Air Products and Chemicals paid at the same time last year, and with a 59% payout ratio, it also has some room to continue increasing its payment.

Looking out a little further to next week, toy maker Hasbro (NASDAQ:HAS) pays its dividend on Feb. 18. While weakness in the holiday season recently sent shares of both Hasbro and archrival Mattel (NASDAQ:MAT) down over the past few weeks, Hasbro's $0.40 dividend remains covered. The company's 70% payout ratio suggests that it will only really have room to raise its dividend if its own holiday earnings come in reasonably well.

Hasbro is due to report today and is expected to make a dividend announcement at about the same time, near the anniversary of its last increase. With that combination, the interplay between the company's announced results and projected dividend will send an incredibly powerful message. Weakness in the dividend combined with weakness in earnings would suggest the company expects the difficult times to continue.

On the flip side, a dividend that is too aggressive in light of earnings weakness would suggest that Hasbro may have become too focused om the short term. After all, a dividend takes cold, hard cash flow to support. If too large, the dividend could threaten a company's ability to invest in its own longer-term future.

Whatever happens, cash in hand stays there
While every investor looks to make money on his or her investments, the reality is that not every investment works out. Another advantage of a dividend is that once a company makes the payout to its investors, that cash stays with the investors. Any given dividend may not be a spectacular return itself, but it is a return that stays that way, no matter what the market does to the company's stock next.

Those dividends play a central role in the iPIG portfolio's investing philosophy. Thus far, it's working well, and as of the market close on Feb. 7, 2014, here's what that portfolio looks like:

Company Name

Purchase Date

Total Investment (including commissions)

Value as of
Feb. 7, 2014

Yield as of
Feb. 7, 2014

United Technologies (NYSE:UTX)

Dec. 10, 2012




Teva Pharmaceutical (NYSE:TEVA)

Dec. 12, 2012




J.M. Smucker (NYSE:SJM)

Dec. 13, 2012




Genuine Parts (NYSE:GPC)

Dec. 21, 2012




Mine Safety Appliances (NYSE:MSA)

Dec. 21, 2012




Microsoft (NASDAQ:MSFT)

Dec. 26, 2012





Dec. 28, 2012




United Parcel Service (NYSE:UPS)

Jan. 2, 2013




Walgreen (NASDAQ:WBA)

Jan. 4, 2013




Texas Instruments (NASDAQ:TXN)

Jan. 7, 2013




Union Pacific (NYSE:UNP)

Jan. 22, 2013





Jan. 22, 2013




McDonald's (NYSE:MCD)

Jan. 24, 2013




Becton, Dickinson (NYSE:BDX)

Jan. 31, 2013





Feb. 5, 2013




Air Products and Chemicals

Feb. 11, 2013





Feb. 22, 2013




Emerson Electric (NYSE:EMR)

April 3, 2013




Wells Fargo (NYSE:WFC)

May 30, 2013




Kinder Morgan (NYSE:KMI)

June 21, 2013




Scotts Miracle-Gro (NYSE:SMG)

Jan. 3, 2014








Total Portfolio




Data from the iPIG portfolio brokerage account, as of Feb. 7, 2014.

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Chuck Saletta owns shares of Aflac, Air Products and Chemicals, Becton Dickinson, CSX, Emerson Electric, Genuine Parts Company, Hasbro, J.M. Smucker, Kinder Morgan, McDonald's, Microsoft, Mine Safety Appliances, Raytheon Company, Teva Pharmaceutical Industries, Texas Instruments, Union Pacific, United Parcel Service, United Technologies, Walgreen Company, Scotts Miracle-Gro, and Wells Fargo.

The Motley Fool recommends Aflac, Becton Dickinson, Emerson Electric, Hasbro, Kinder Morgan, Mattel, McDonald's, Mine Safety Appliances, Teva Pharmaceutical Industries, United Parcel Service, and Wells Fargo. The Motley Fool owns shares of CSX, Hasbro, Kinder Morgan, Mattel, McDonald's, Microsoft, Raytheon Company, and Wells Fargo.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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