Dividend growth investing is a slow and steady process taking place over a long period of time. The goal is to grow a stream of dividend income by buying stocks which not only pay a reasonable dividend today but are expected to raise that dividend consistently in the future. By reinvesting these dividends the income stream grows even faster. The Ultimate Dividend Growth Portfolio, which you can track here, is only a few months old but has now received its first serious dividend payments. I’ll use these proceeds to open a new position and increase the dividend stream even further.
But before I talk about the new position, two of the existing positions in the portfolio recently announced earnings.
Good and bad for the cereal king
What worried analysts and investors was the company’s guidance. General Mills, Inc. (NYSE:GIS) forecast sales for fiscal 2014 to grow at a low-single-digit rate and exceed $18 billion, compared to analyst expectations of $18.40 billion in sales. EPS was forecast to be between $2.87 and $2.90 in fiscal 2014, below the $2.93 analysts were expecting. The CEO had this to say:
The economic recovery continues to be very slow and we think the consumer is still quite cautious. And it’s very competitive out there. It (the forecast) may be a little prudent for some, but we think that’s probably appropriate given the economic conditions.
In terms of the dividend this earnings report doesn’t change much. The company has already declared that its next dividend payment, which goes ex-div on July 8, will increase by 15% over the last payment. This puts the projected dividend yield at 3.13%
The payout ratio with respect to 2014 expected earnings is about 50%, which is nothing to worry about and may indicate that the company can afford to boost the dividend by a similar amount next year. I think you can count on at least high-single-digit or low-double-digit dividend growth in the near future from General Mills, Inc. (NYSE:GIS). And as the economy improves the company may very well beat its estimates for next year, possibly leading to a bigger dividend bump.
Less traffic, lower stock price
Walgreen Company (NYSE:WAG) increased both revenue and earnings, with revenue rising by 3.4% compared to last quarter and 1.4% year-over-year, and EPS (adjusted for items) rising by a solid 18%. The company filled a total of 209 million prescriptions in the quarter, up 8.7% from last year. While same-store sales rose by 0.4%, customer traffic decreased by 3.9%, a point of worry for investors.
Analysts expected both higher revenue and higher earnings, but it seems to me that the sell off is quite a bit overdone. Even in a weak economy the company grew both revenue, albeit slowly, and earnings, and it may be that expectations were set a bit too high.
The dividend has now gone four payments without an increase, so I think that we can expect one to be announced in August. With a yield of only 2.5%, dividend growth needs to be robust to justify Walgreen Company (NYSE:WAG)’s position in the portfolio, so I’ll be looking for a mid-teens percent increase. The nice thing about Walgreen Company (NYSE:WAG) is that the payout ratio is so low that the dividend has plenty of room to expand. Just about a third of the free cash flow is used for the dividend, so even slow earnings growth can lead to substantial dividend increases.