One of the more popular investing strategies these days is income investing. In the years since the 2008-2009 recession, more and more investors are clamoring for the steady returns provided by dividends. There's good reason for this considering that dividend payouts have historically been an important component of total returns.

That's why stocks that have solid dividend yields, like major food companies ConAgra Foods (NYSE:CAG) and Campbell Soup (NYSE:CPB), attract lots of attention. Indeed, ConAgra's 3.2% dividend yield towers above what you'll get from the average stock. The yield of the S&P 500 index stands at approximately 2%.

But ConAgra doesn't have as much to offer as you might think. Dividend growth is a huge part of income investing. Investors should be concerned about dividend growth as well to make sure their purchasing power is protected with inflation.

For that reason, ConAgra will disappoint you. Its dividend growth over the past several years and its prospects for future dividend growth leave much to be desired due to its overly cautious management.

When dividend yield doesn't tell the whole story
Sometimes, a stock's dividend yield can be misleading. ConAgra's dividend yield looks good now, but its future dividend growth potential is disappointing. That's because ConAgra management is fairly stingy with cash flow.

Here's how ConAgra stacks up against Campbell Soup in some key financial metrics, including their abilities to generate cash flow and the amount of their cash that is distributed to investors.


5-Year Dividend CAGR

Free Cash Flow Payout Ratio

5-Year Free Cash Flow CAGR





Campbell Soup




Source: ConAgra and Campbell Soup 2009-2013 10-K

And yet, management is fairly conservative when it comes to the dividend. The company has only grown its distribution by 5% compounded annually over the past five years despite the fact that it paid out less than half of its free cash flow last year.

Management's reluctance to send more cash back to investors is equally confusing given the way the company stacks up against Campbell Soup, a close competitor in the packaged-foods industry. ConAgra's compound annual dividend growth over the past five years clocks in at just 1 percentage point higher than Campbell's, even though ConAgra's cash flow generation has been much stronger. Moreover, ConAgra carries a more modest payout ratio, meaning it has enough financial flexibility to be more generous with its payout.

But ConAgra's dividend growth has really stalled. In fact, the company has increased the payout once in the last two years. Here are the primary culprits.

What's causing ConAgra to hold steady?
One of the reasons behind ConAgra's slowing dividend growth is that management is worried about its major acquisition. In an attempt to boost its presence in private-label brands, ConAgra bought Ralcorp Holdings for $4.9 billion.

But the acquisition isn't going well. ConAgra is struggling with significantly elevated costs. ConAgra's private-brands segment posted a $573 million net loss last quarter due to significant impairment charges resulting from higher-than-expected integration costs.

In addition, management is worried about the company's bread-and-butter products losing favor with consumers. Consumer preferences can swing wildly, and shelf-stable products are losing out to fresh alternatives in the grocery aisle.

To that end, ConAgra's flagship consumer-foods segment, which includes its core brands Healthy Choice, Orville Redenbacher's, and Chef Boyardee, posted a 7% sales decline in its recently concluded fiscal year.

For these reasons, management is content to keep its dividend growth on hold.

ConAgra management is too conservative
It's understandable that ConAgra would avoid giving investors a huge dividend increase that might jeopardize its cash flow. But a modest bump in the dividend, similar to its historical dividend increases over the past five years, would hardly bring the company to its knees. It would, however, represent a nice boost for its faithful shareholders who are sticking with the company through thick and thin.

ConAgra is in a difficult period, but its financial position is far from dire. The company still generates healthy free cash flow and distributed less than half of it last year. ConAgra has more than enough room to increase the dividend.