These stocks raised their dividend by more than 25%
Most companies raise their dividend cautiously, by a few percent a year. However, there is a group of companies that have increased shareholder payouts by a quarter or more in recent months. These are not high-yield stocks, but growth companies whose earnings and cash are growing so fast that they can afford a more generous dividend without strain on the balance sheet. But is it sustainable in the long term?
Key points
The fastest-growing dividends today may not be offered by classic dividend stocks. An interesting story lies precisely in companies where the current yield is surprisingly low.
A dividend increase of 25% or more can be a strong signal of management confidence. But the percentage alone does not tell how sustainable this growth actually is.
All four companies pay out less than a third of their earnings. So there is room for further dividend growth, but for each company it is determined by a completely different factor.
A low dividend yield may not be a disadvantage for a long-term investor. The pace at which the payout can increase in the coming years can be decisive.
Dividend growth is only one part of the story. Valuation, buybacks, and market expectations can ultimately determine an investor's return much more.
When investors hear the word dividend, they usually think of utilities, telecoms, or consumer giants with a yield of 3 to 5% and an annual increase around inflation. Such a strategy has its place, but the dividend story of recent years is being written elsewhere. The fastest-growing dividends today are often paid by companies that have a low current yield, but earnings and free cash flow growing at a double-digit pace.
For a long-term investor, this is a significant difference. A stock with a yield of 0.5%, whose dividend grows by 25% per year, will reach a yield on cost of roughly three times today's level within five years, regardless of the movement of the stock price itself. But even more important is the signal that such an increase sends. Management that increases the dividend by a quarter is signaling that it believes in the permanence of higher earnings. Cutting the dividend is one of the most painful steps for company leadership.
The key measure of sustainability is the payout ratio, i.e., the share of earnings that the company pays out to shareholders. For all four companies in this selection, it is below 32%, so the dividend is covered with a large margin. We selected companies that have increased their dividend by at least 25% in the last 24 months, or whose paid dividend in dollar terms increased by more than a quarter year-over-year. Which stocks are they?