Disney (NYSE:DIS) recently announced a big dividend increase of 15%, which comes on the back of a massive 34% dividend hike announced in December. The company is building an impressive track record of dividend growth, and it's well positioned to continue increasing payments for years to come. Companies with consistent dividend growth tend to materially outperform the market over time, so this is excellent news for investors in Disney stock.
A fairy tale for dividend growth investors
Last week, Disney declared a cash dividend of $0.66 per share for the first six months of fiscal 2015. The company will now begin paying dividends on a semi-annual basis, rather than once a year. Also, the annual dividend total is increasing by 15% versus the payment for 2014.
Interestingly, Disney had just increased its payout by 34% last December, so its dividends are growing at an amazing speed. The dividend yield is still quite modest, at 1.15% based on the current stock price. However, the growth trajectory of those dividends is nothing short of impressive: What was an annual dividend payment of only $0.35 per share in 2009 has now turned into $1.32 per share.
Importantly, Disney has a lot of room to continue raising its dividend in the future. The company has a world-class business model benefiting from enormously valuable brands and industry-leading intellectual property. This has allowed Disney to deliver spectacular financial performance over the years, and key variables such as sales, operating cash flow, and earnings per share are all hitting new records.
Besides, growth prospects look quite strong. Among other promising projects, Disney will be launching the new Star Wars movie, The Force Awakens, in December. Management has already confirmed that it's working on additional movies to fully capitalize on the Star Wars franchise. Disney has a unique ability to create massive blockbusters, and the company's pipeline is full of exciting content.
Based on its diluted share count of 1.7 billion, Disney's dividends currently cost about $2.2 billion annually. Disney produced almost $2.9 billion in free cash flow during the first six months of fiscal 2015, which equals $5.8 billion on an annualized basis. This shows that the company can easily continue raising its dividend, especially since free cash flow will probably keep growing at a nice rate.
How growing dividends drive superior returns
Many dividend investors tend to focus their attention on metrics such as dividend yield. This is quite reasonable since companies that have high dividend yields are often undervalued. Besides, investors who need income from their investments, such as those in retirement, are naturally inclined toward companies making big distributions.
On the other hand, investment performance doesn't just depend on the size of the dividend in relation to the stock price. The trend in dividend payments can be even more important than the size of those payments, and companies with high dividend growth tend to deliver superior returns over the long term when considering both income and capital gains.
Dividends are a clear and transparent reflection on a company's fundamentals. Earnings and other metrics can be manipulated by management. However, when a company commits to making cold, hard cash distributions to investors, that's usually because management believes it can sustain those payments in the future. Consistent dividend growth shows that the company is producing increasing cash flow over time, and also that management is confident enough in the future of the business to make growing distributions to investors.
Analysts at Goldman Sachs studied the returns of different kinds of stocks from January 31, 1972, to December 31, 2014, and the conclusions from this study are quite interesting. To begin with, dividend-paying companies tend to outperform their non-dividend paying counterparts by a considerable margin. Based on this data, a $10,000 investment in non-dividend paying stocks would have turned into $30,316 by the end of the period, while the same amount of capital invested in dividend stocks would have turned into a much bigger $461,904.
Still, companies with consistent dividend growth did even better. A $10,000 investment in companies starting new dividends or raising their payments every year would have turned into $630,024 by the end of the period, comfortably beating both companies with stable dividends and those paying no dividends at all.
Dividend growth stocks can be remarkably lucrative investments. Disney does not pay a particularly big dividend yield, but the company is rapidly increasing payments, and it has what it takes to sustain dividend growth for years to come. With this in mind, the future looks quite promising for investors in Disney stock.
Andrés Cardenal owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.