The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.
Today, we'll take a closer look at one of the least generous dividend policies on the Dow Jones Industrial Average (^DJI -0.00%). I'm talking about chemicals giant E.I. Du Pont de Nemours (DD).
DuPont's current dividend yield is a fairly generous 3.2% -- just north of the Dow's average number. But DuPont's admirable performance in the yield column is not the result of muscular dividend boosts. Instead, you could pin the high yield on disappointing share-price gains.
DD Dividend data by YCharts.
If you bought DuPont shares a decade ago, you locked in a yield somewhere around 3.4%. The company has increased its payouts on a fairly regular basis since then, but not by large amounts. When all is said and done, DuPont has boosted its dividends by just 29% in 10 years for an annual increase of 2.1%. But the yield remains generous anyhow, because share prices only climbed 28% over the same span. That's far behind the Dow's 66% gain. The picture doesn't change much if you assumed that every dividend check from DuPont and a Dow index fund were reinvested in more shares along the way.
The company just approved another 5% dividend hike. That's an improvement over recent history, but it's still weak in the context of the Dow. Only seven of the other 29 Dow components increased their dividends less than DuPont did in the last year. That includes Bank of America (BAC -0.04%), which cannot juice up its payouts until the government says it's OK -- and the bank didn't even ask for permission in this spring's evaluation. Investors in the megabank keep hoping for a richer yield, but mum's the word so far.
Other weak hands include telecom giants AT&T and Verizon, which already boast the fattest yields on the blue-chip index and operate in an increasingly mature industry. Nobody expects big dividend boosts out of that sector, and the telecoms deliver on that non-promise in spades. Both Ma Bell and Big Red have increased their payouts by less than 6% per year in the last decade -- a feat matched by just five other Dow members (including, of course, DuPont).
On the other hand, when your operations lean toward manufacturing and infrastructure, as DuPont's do, the increases are expected to arrive early and often. Caterpillar (CAT 0.39%) would be the most obvious example of this among the Dow 30. The construction machinery expert increased payouts by 84% in the last 12 months alone and by an average of 14% over a decade. That's how you reward shareholders for their stakes in a cash machine of epic proportions.
This explains why DuPont's policy isn't growing faster. The company is stuck in reverse with minuscule revenue growth and shrinking profit. Its business is the very definition of a commodity play, where the costs of raw materials and finished products largely set the bar for your profit. DuPont itself doesn't have much power over the bottom-line outcome, so management must settle for staying out of trouble and hoping for better price trends.
In other words, DuPont doesn't look all that likely to kick its dividend boosts into high gear anytime soon. Income investors are sure to find better bets in other Dow stocks.
