For those of you either in or approaching retirement, extra income could be an important part of a successful investment strategy.
There are some moves that can be made now to improve the chances of prosperity during the golden years.
They don’t include relying on increases in long-term interest rates based on potential actions by the U.S. Federal Reserve; hoping Congress ensures the viability of the Social Security system or trying to time the market.
They do include finding companies that have paid, and consistently raised their dividends over long periods of time. Past performance is no guarantee for the future, but those businesses that have a long history of increased payments will probably continue to do so unless fundamentals change significantly.
Most dividend growers have a few common characteristics:
1. Steady earnings growth,
2. Plenty of free cash flow from those earnings,
3. Providers of certain products that consumers need or want on a daily, weekly, or monthly basis (i.e. no cars, refrigerators, smartphones),
4. Low or moderate payout ratio (or the portion of earnings paid out as dividends),
5. Little or no debt.
I’ll examine several companies that have all or most of those traits.
Many people buy deodorant, laundry detergent, paper towels, toothpaste, and shaving cream regularly. They are just some of the items provided by the world’s largest consumer products company, The Procter & Gamble Company (NYSE:PG).
Sales of those products have provided a steady stream of cash flow into the company’s coffers. Although growth has slowed somewhat lately, recent management changes are designed to reverse the trend. The board of directors recently brought back former CEO A.G. Lafley, who presided over the company during a solid growth phase, to take over again.
With a moderately low payout ratio (50%) and long-term debt ratio (32%), and lots of free cash flow ($3.1 billion last year), the company has all the ingredients in place to grow the dividend, which has been increased every year since 1956. The current dividend of $2.41 per year has risen at a compounded annual rate of 8.9% over the last five years, handily beating inflation.
Fill it up
In spite of calls from politicians and environmentalists to curb greenhouse gas emissions, consumers and businesses are going to need to buy gasoline for at least the next several decades.
Many people fill up their tanks on a weekly basis and the resulting sales provide a big windfall to major integrated oil and gas companies like Chevron Corporation (NYSE:CVX).
The California-based company has a low payout ratio of 27%, hardly any debt, consistent earnings growth (in spite of a slight slowdown this year), and plenty of cash that will allow it to keep increasing its dividend, presently at $4 per share. Since 2008, the payments have been growing at a rate of 8.4% each year. It has raised the dividend every year since 1988.
Chevron Corporation (NYSE:CVX) will also benefit from exporting liquid natural gas overseas to take advantage of relatively low domestic prices here.