I've long found that the combination of growing dividends along with simultaneous share buybacks can indeed be a powerful one. Theoretically, neither action makes sense. Even at the fairly low current tax rates, dividends may be viewed as a waste of capital. Here's why. Companies pay taxes on income then distribute a portion to shareholders, who in turn pay taxes to federal and state governments. Had the funds instead stayed with the company, less capital would have flowed to the government in the form of taxes.
In the case of buybacks, the argument can be made that the company repurchasing shares must be out of productive ways to deploy its cash -- indicating that future growth opportunities must be limited. You could also make a similar argument about dividends.
Of course, theory and practice quickly part ways, especially when it comes to investors, their behavior and attitudes toward having cash returned to them. It's not just about the yield itself and having the "bird in the hand" that cash dividends represent, but also the growth in dividends.
Unlike earnings, dividends can't lie. What you see is what you get -- and growing dividends can be an indicator of a company's health. There is a level confidence shown by management teams which continue to increase dividend payouts. To do so when they really can't afford to would be unwise, and ultimately cause damage to the stock if a dividend cut becomes necessary. So to a certain extent, this creates some checks and balances. That's not to say that mistakes aren't made, and certainly not all company management teams are created equal.
It's been a couple of years since I unveiled the last tracking portfolio devoted to this methodology, so I've endeavored to put forth a new one for 2019, based on the same criteria.
Criteria for inclusion include the following:
- Minimum Market Cap: $2 billion
- Minimum dividend yield: 2%
- Reduction in shares outstanding 3-year average of 5% or more
- Minimum five-year dividend growth of 5% or more
This time around, 24 names made the cut, up from 14 in the last version. There are several familiar names, including Corning (GLW) , which has reduced shares outstanding by 35% since year-end 2015, while increasing dividends at a 13% clip (compound annual growth rate) over the past five years. Restaurants are well represented by McDonalds (MCD) and Wendy's (WEN) , while several retailers including Target (TGT) , Best Buy (BBY) , Kroger (KR) , Kohl's (KSS) , Foot Locker (FL) , and Dick's Sporting Goods (DKS) .
Other qualifying names include:
Boeing (BA)
Citigroup (C)
American International Group (AIG)
LyondellBasel Industries (LYB)
Discover Financial Services (DFS)
Ameriprise Financial (AMP)
Fifth Third Bancorp (FITB)
Regions Financial (RF)
Fidelity National Financial (FNF)
Whirlpool (WHR)
Harley-Davidson (HOG)
ManpowerGroup (MAN)
CIT Group (CIT)
Wyndham Destinations (WYND)
Legg Mason (LM)
For future columns, I am contemplating rolling out a small/micro-cap version.
