Most income investors are looking for strong and reliable investments with an excellent track record. This is why I take notice when some of the stock market's most established dividend stocks increase their dividends.
In September, three well-known dividend stocks announced meaningful increases to their dividends, extending their long history of dividend increases another year. These stocks were software giant Microsoft (MSFT 0.46%), fast-food king McDonald's (MCD 1.32%), and industrial manufacturer and home-technology company Honeywell (HON 0.68%).
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Microsoft
|
Dividend Yield |
Dividend Increase |
3-Year Average Annual Dividend Growth |
Payout Ratio |
|---|---|---|---|
|
2.3% |
7.6% |
10.7% |
56.5% |
Data sources: Yahoo! Finance and Morningstar.
Microsoft announced a 7.6% increase to its quarterly dividend on Sept. 19. Payable on Dec. 14, the higher dividend marks the software company's 14th dividend increase in a row.
The dividend increase was a slight deceleration in dividend growth -- but not by much. In 2016, Microsoft increased its dividend by 8.3%. Further, for the company's past three dividend increases, Microsoft has averaged compound annual dividend growth of 10.7%.
With a payout ratio of about 57%, Microsoft looks well positioned to continue increasing its dividend in the coming years. But the case for dividend growth improves even more when investors consider the company's trailing-12-month dividend payments as a percentage of free cash flow. Microsoft only paid out about 38% of its free cash flow in dividends.
McDonald's
|
Dividend Yield |
Dividend Increase |
3-Year Average Annual Dividend Growth |
Payout Ratio |
|---|---|---|---|
|
2.6% |
7.4% |
5.9% |
60.8% |
Data sources: Yahoo! Finance and Morningstar.
On Sept. 21, McDonald's announced a 7.4% dividend increase, payable on Dec. 15. It marked a notable acceleration from last year's increase, when the company increased its dividend by 5.6%. The increase gives McDonald's an extremely rich dividend history, with annual dividend increases going all the way back to 1976.
With a payout ratio of just 60.8%, McDonald's has plenty of room for more dividend increases in the future. Even more, the company's strong earnings growth recently helps make meaningful dividend growth in the coming years even more likely. The company's EPS in its most recent quarter was up 36% year over year, or 19% when excluding the impact of strategic charges during these periods. Furthermore, EPS increased 13% during 2016.
It's also worth noting that while the 2017 dividend increase was the lowest of these three companies, it has the fattest dividend yield.
Honeywell
|
Dividend Yield |
Dividend Increase |
3-Year Average Annual Dividend Growth |
Payout Ratio |
|---|---|---|---|
|
2.1% |
12% |
12.9% |
40.2% |
Data sources: Yahoo! Finance and Morningstar.
Announced on Sept. 29, Honeywell's dividend increase was the strongest of these three companies. It boosted its quarterly dividend by 12%. That compares with an 11.7% year-over-year increase last year.
Of all three of these stocks, Honeywell's dividend growth in the coming years is arguably the most certain. Not only does the company boast the lowest payout ratio, but management has also explicitly committed to growing its dividend faster than earnings. Dividend growth is a core tenet of the company's fiduciary approach to building shareholder value.
"Since 2010, and including the 12% increase announced today, we have increased the dividend rate 10% or more eight times," management said in a statement along with the announcement of its dividend increase. "This is consistent with our approach to return capital to shareholders through our aggressive capital deployment strategy, which also includes growth investments through high-return capital expenditures, accretive mergers and acquisitions, and share repurchases."
All three of these stocks offer a good balance of dividend yield and dividend growth.
