Dividend growth has been fast over the last three years according to WisdomTree. It has built an index and associated ETF to capture that growth. However, WisdomTree’s own numbers show that an index of companies with long histories of dividend increases outperforms. Only dividend increases aren’t a sure sign of a winner.
Slicing and dicing
WisdomTree’s director of research Jeremy Schwartz recently released a report highlighting dividend growth. The only problem is that WisdomTree’s numbers tell a good story that supports companies with long histories of dividend increases. Indeed, the S&P High Yield Dividend Aristocrats Index was the better long-term performer. That index requires 20 years of dividend increases for a stock to be included.
Fast dividend growth is nice to see, but consistent growth appears to be the better long-term bet. However, that doesn’t mean that investors should blindly buy companies with long histories of dividend increases either.
In fact, Schwartz explained that recovering dividends in the finance sector was a prime reason for the recent dividend growth he highlighted. Finance was once considered a cornerstone of dividend investing until the financial crisis led to sector-wide cuts. So, before you go and start buying stocks from a dividend index, consider these three stocks:
A problem child
Pitney Bowes Inc. (NYSE:PBI) is best known for its postage meters. With decades of annual dividend increases behind it, it was a long time member of the Dividend Aristocrat list. Selling postage meters, however, has been a rough business since electronic communications are quickly replacing physical ones.
The stock’s yield is a reasonable 5% or so; that’s down from its previous level of around 10%. Unfortunately, a 50% dividend cut is the reason, not a huge run up in the shares. When the S&P index is next reconstituted Pitney Bowes Inc. (NYSE:PBI) should drop out.
The cut was pretty much telegraphed when the company brought in a new CEO and then decided not to increase the payout at the regular annual interval. Clearly, the board was letting the CEO get the cut out of the way early in his tenure instead of forcing him to backtrack on an increase. These types of actions are a warning sign for dividend investors (the same thing happened at Avon).
Stuck in a still struggling industry, Pitney Bowes Inc. (NYSE:PBI) is best avoided. It is also a good warning that a long history of dividend increases isn’t a lock on future dividend hikes.
A better transition
AT&T Inc. (NYSE:T) is a telecom giant in the U.S. It has a large land-line business that is in slow decline and is part of an effective duopoly in the growing cell phone industry. One is a cash cow, the other is the company’s future. AT&T Inc. (NYSE:T)’s recent dividend yield was around 5% and it has a long history of regular annual dividend increases.
Revenue has been on a fairly steady upward climb over the last decade and is largely annuity-like. Earnings have been volatile, but soundly in the black. Although the company’s earnings didn’t cover its dividend last year there shouldn’t be too much concern. Dividends are paid out of cash flow, which adds back in such non-cash items as depreciation. AT&T Inc. (NYSE:T)’s business means it has lots of depreciation and, thus, can handily afford the dividend. Moreover, it is successfully transitioning to newer technology, unlike Pitney Bowes Inc. (NYSE:PBI).