I'm a dividend investor, which really changes the way I think about companies. Dividend safety and growth tend to play an outsize role in my selection process. Earnings, while important, aren't the key figure for me. That's why Hormel Foods (HRL -1.48%), which is facing inflationary headwinds, is a holding I added to recently, giving it an overweight position in my portfolio. Here's why I made that move.
One plus a little more
I invest an equal amount of money into each stock I own when I initiate a position. This helps me to avoid putting all of my eggs into one basket and simplifies the diversification process because I tend to hold on to my investments until something changes at the company. I don't try to rebalance, preferring to let my winners run, as they say on Wall Street. But there are times when an investment I own becomes attractive again, and at that point, I need to make a judgment call: Buy more or just sit tight with what I own?
When Hormel's dividend yield lurched above 2% recently, I made the judgment call to add to my position. Thus, I've overweighted it, which I don't do very often. It was yielding around 2% when I first added it to my portfolio. The interesting thing is, the stock itself has been a decent performer for me since I bought it, which actually goes a long way to help explain why the 2% yield was so attractive.
Dividend growth matters
I could sing the praises of Hormel's business, but that's not what this is about. I'll just say that it has a long history of success in the protein space, offering up a collection of strong brand names (like SPAM, Planters, Skippy, and Columbus) to both consumers and restaurants. It tends to be conservatively managed, with modest leverage and strong support for creating new and innovative products. And this feature is a bit unusual: The Hormel Foundation owns a huge stake in the company with the stated goal of ensuring its independence. So I'm not worried about Hormel getting swallowed up by another company.
This is a dividend-growth name for me. I tend to favor higher yields (in the 4%+ space), but that generally leaves me with slower-growing dividends. Hormel's annual dividend growth over the past decade was a huge 14% or so. Backing that up is the fact that the company is a Dividend King with over 50 consecutive years of dividend increases under its belt. You don't achieve a record like that without running a very good business. As it stands, 2% is toward the high end of Hormel's historical yield range. So I have been buying at what I believe is a relatively cheap valuation.
But here's the important thing to remember in all of this: Dividend stocks often trade in yield ranges. So if Hormel's yield is 2%, and it raises the dividend by 5%, the stock will need to go up 5% to keep the yield at the same level. Thus, every dividend increase helps to support share-price growth over time.
To put some numbers on that, over the past decade Hormel's dividend has grown about 225%. Its stock has gone up roughly 255% over that same span. And the dividend yield is roughly the same today as it was 10 years ago. There were some periods when the stock rallied and the yield fell to low levels, and when the stock was weak and the yield rose toward the 2% mark. Those are just the normal fluctuations of the stock market. In the end, though, buying at the high end of the yield range has worked out very well for investors.
Lately, the big fear is inflation, which is going to put downward pressure on Hormel's margins. But inflation isn't new in the food space, and the company will eventually pass its rising costs on to customers. Like other inflationary periods over the past 50 years, this will likely be a transitory headwind for Hormel. Thus, I think overweighting my position on price weakness is a good call.
The key for my decision with Hormel is that nothing material has changed with the story. It is still a great food stock with a strong dividend track record. And, thus, I'm confident in adding to my position in the face of headwinds that have others selling the shares. While I've overweighted my position in Hormel today, I just couldn't pass up a return to the historically high yield that attracted me to it in the first place so many years ago. In fact, with the yield still up around the 2% mark, you might want to take a close look at it, too.