Do Nothing, Get Paid More

If you own shares of a company's stock, you're a part owner of its business. Your main rewards for investing in that company come from three sources:

• Growth in per-share profits
• Expansion in the market's earnings multiple for those profits
• Dividends

Over time, other factors wash out as noise. In addition, none of those rewards are guaranteed. Yet dividends offer a key advantage.

Why dividends rule
The advantage of dividends is simple: Once you receive the cash, it's yours. If the company struggles later, its shares may falter, but unless you reinvested in the company's stock, that cash is no longer exposed to those risks.

In addition, many dividend payers increase their dividends as they grow over time. As an investor, simply holding on gets you that income growth. It's that type of investment that the real-money Inflation-Protected Income Growth portfolio seeks. A rising income stream from growing dividends often helps investors protect themselves from the long-run ravages of inflation.

How's it going?
The table below shows the per-share amounts for the companies that paid dividends to the iPIG portfolio in June. Each bested its year ago payment by more than the official 2.1% inflation rate over the past 12 months. 

*iPIG portfolio did not receive year-ago dividend. **After foreign withholding tax. ***Year-ago dividend paid in May. Data from the iPIG portfolio brokerage account and Yahoo! Finance as of June 30, 2014.

Income growth faster than inflation helps a retiree living off dividends maintain a steady lifestyle and gives a working investor a growing pile of cash to put toward another opportunity. Additionally, an investor who owns stocks that pay and grow dividends can still benefit from profit growth and multiple expansion, should they occur.

The table below shows this in action. It shows the total returns of the iPIG portfolio versus the S&P 500 and the SPDR S&P 500 (SPY +2.50%) ETF that tracks it:

Data from the iPIG portfolio brokerage account and Yahoo! Finance, as of June 30, 2014

Despite its focus on a growing income stream rather than total return, the iPIG portfolio has tracked fairly closely with the S&P 500 since launching, even slightly outperforming the raw index's substantial gains. The SPDR S&P 500 results do show the power of dividends, though, as that tracking ETF has somewhat bested the portfolio's total returns once those dividends are included.

What comes next?
Of course, while that's a great scorecard for how that strategy has performed, no one knows what will come in the future. On that front, the available data suggests more of the same from the iPIG portfolio.

On July 1, two iPIG picks paid their dividends: Union Pacific (UNP +0.67%) and Genuine Parts (GPC +2.37%). Both increased their dividends since last year. Union Pacific's $0.455 dividend is nearly 32% higher than the split-adjusted $0.345 it paid last year. Genuine Parts' $0.575 dividend is around 7% higher than what it paid last year. 

Additionally, two iPIG picks with August dividends have already announced their payments. Both Hasbro (HAS +4.63%) and Raytheon (RTN +0.00%) are paying higher dividends in August than they paid last year. Hasbro's $0.43 is 7.5% higher than the $0.40 it paid last August, and Raytheon's $0.605 is 10% higher than the $0.55 it paid last August.

As great as that inflation-beating dividend growth has been -- and will probably continue to be -- one of the best parts has been the fact that the iPIG portfolio took no action to get those raises. Those increases came automatically to shareholders, once the companies decided to pay them.

So what makes an increase possible?
Dividends aren't guaranteed, much less dividend growth. For a company to regularly increase its dividend requires both significant operating discipline and a willingness to consistently invest in profitable growth. When Union Pacific announced its most recent dividend increase, it simultaneously announced a $3.9 billion capital spending plan -- the investments needed to ultimately fund that dividend growth. Likewise, when Raytheon increased its dividend, it credited its strong financial position and outlook, along with its balanced capital-deployment strategy, for its ability to offer shareholders another raise.

Over time, such behavior can even become ingrained in a company's culture. Take Genuine Parts, which has now paid increasing dividends for 58 consecutive years. That's a trend that survived the 1970s stagflation, a series of Middle East wars and oil price shocks, and even our recent financial crisis and the subsequent Great Recession. That 58-year track record is remarkable on its own, but it's doubly so when you realize that Genuine Parts' best-known business is NAPA Auto Parts.

Despite the well-publicized bankruptcies and other troubles in the auto industry over the past few years, Genuine Parts continued to pay and increase its dividend over that same period of time. A culture of long-term thinking, maintaining strong financial positions, and smart and balanced capital-allocation strategies, built across decades, enabled it to be part of a small, elite cadre of companies with that kind of dividend history. That helped the company survive -- and continue to thrive -- in some very rough times, while simultaneously rewarding its shareholders with cold, hard cash for the very real risks they take by investing.

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