Collecting Growing Dividends
It’s official: the Dow Jones Industrial Average climbed 7.2% last month, marking its best June performance since 1938. Also, the S&P 500 surged 17.3% in the first six months of 2019, representing the index’s best first half of a year since 1997.
But we know there must be something lurking beneath the surface. The U.S. stock market hasn’t had a proper correction since the last financial crisis.
While there have been a few pullbacks, the valuations of most U.S. equities remain bloated by historical standards. And given the geopolitical uncertainties and sluggish global economic growth, who knows how long the current bull run will last?
It is at this particular moment that dividend growth stocks should start playing a more important role in a risk-averse investor’s portfolio.
I know, compared to how much the market has gone up recently, a few percentages of dividend yield don’t seem like much. However, for a company to pay dividends to investors, it does not need bullish market sentiment. That is, we could be in a massive sell-off, but if a company decides to pay a cash dividend, its shareholders will get a check in the mail.
Therefore, owning a portfolio of solid dividend stocks can be a great way for investors to ride out a market downturn.
What’s even better is that some dividend-paying companies raise their payouts on a regular basis. So over time, investors in these companies get to collect an increasing dividend stream.
Again, the idea of earning increasing cash dividends may not look like a big deal right now, but the strategy could serve investors well when the market goes south. Moreover, historically, dividend growth stocks have outperformed the overall market.
3 Dividend Increases in August 2019 to Watch
Investors can find dividend growth stocks in many different industries. To provide a starting point, here are three companies that are well positioned to raise their cash payouts next month.
| Company Name | Stock Ticker | Dividend Yield |
| Illinois Tool Works Inc. | (NYSE:ITW) | 2.7% |
| Federal Realty Investment Trust | (NYSE:FRT) | 3.1% |
| Oasis Midstream Partners LP | (NYSE:OMP) | 8.4% |
Illinois Tool Works Inc.
The first one is Illinois Tool Works Inc. (NYSE:ITW), a multi-industrial manufacturer headquartered in Glenview, Illinois.
The company has seven operating segments: “Automotive OEM,” “Food Equipment,” “Test & Measurement/Electronics,” “Welding,” “Polymers & Fluids,” “Construction Products,” and “Specialty Products.”
Due to the nature of its business, Illinois Tool Works may not be a familiar name to most consumers. But for dividend investors, ITW stock has done a tremendous job. The company has increased its dividend every year for more than five decades. (Source: “Dividend History,” Illinois Tool Works Inc., last accessed July 2, 2019.)
The latest dividend hike, which was announced last August, brought the company’s quarterly cash dividend from $0.78 per share to $1.00 per share—a 28.2% increase. Trading around $148.00 per share, Illinois Tool Works stock offers investors an annual yield of 2.7%.
Now, I should point out that Illinois Tool Works has been around since 1912. And despite being a century-old company, it still manages to grow its business.
In 2018, Illinois Tool Works generated $14.8 billion in total revenue, representing a three percent increase from 2017 (and a two percent increase organically). At the bottom line, the company earned a net income of $7.60 per share in 2018, marking a 15% increase from the prior year. (Source: “ITW Reports Fourth Quarter and Full Year Results,” Illinois Tool Works Inc., February 1, 2019.)
And since ITW stock declared total dividends of $3.56 per share last year, its earnings per share figure covered the payout with ease.
Going forward, the industrial equipment manufacturer is expected to further expand its business. For full-year 2019, management projects that ITW will deliver organic revenue growth of between 0.5% and 2.5%. Meanwhile, the company expects to earn a net income of $7.90 to $8.20 per share, which would represent a year-over-year growth rate of about four to eight percent. (Source: “ITW Delivers $1.81 Earnings per Share,” Illinois Tool Works Inc., April 25, 2019.)
Worth noting is that paying a dividend is not the only method that Illinois Tool Works returns cash to investors. The company also buys back its stock. In 2018, the company spent $2.0 billion repurchasing its own shares. And right now, it’s on track to buy back $1.5 billion of its stock in 2019.
Considering that Illinois Tool Works has a market capitalization of $48.2 billion, it is spending quite a bit of money on buybacks. This method of returning cash to investors reduces the number of shares outstanding, allowing each remaining shareholder to own a slightly larger portion of the company.
In recent years, Illinois Tool Works Inc. has usually made changes to its dividend policy in early August. Given the company’s growing business and low payout ratio, I expect its board of directors to announce another sizable dividend increase in the next several weeks.
Federal Realty Investment Trust
Being a landlord is one of the oldest ways to earn a passive income. And thanks to the creation of real estate investment trusts (REITs), small investors can own a portion of a large real estate portfolio and collect regular dividends from it.
Founded in 1962, Federal Realty Investment Trust (NYSE:FRT) is one of the oldest REITs in business. Today the company owns, manages, and redevelops urban, mixed-use properties and high-quality open-air shopping centers.
According to the company’s latest investor presentation, its real estate portfolio consists of 105 properties totaling approximately 24 million square feet. (Source: “Investor Presentation First Quarter 2019,” Federal Realty Investment Trust, last accessed July 2, 2019.)
Business has been going quite well for this giant landlord.
In the first quarter of 2019, Federal Realty Investment Trust’s comparable property operating income increased 3.5% year-over-year. On a comparable basis, the company leased 247,331 square feet of space at an average rent that was 10% higher than what was previously paid for the same space. The REIT’s portfolio was 94% leased as of March 31. (Source: “Federal Realty Investment Trust Announces First Quarter 2019 Operating Results,” Federal Realty Investment Trust, May 2, 2019.)
FRT stock currently offers an annual dividend yield of 3.1%.
As for dividend safety, Federal Realty Investment Trust generated funds from operations (FFO) of $1.56 per share in the first quarter of 2019, which represented a 2.6% increase year-over-year. Given its quarterly cash dividend of $1.02 per share, the company had an FFO payout ratio of 65.4%.
In the REIT business, I prefer companies that pay out less than 90% of their FFO, due to the margin of safety. Using that as a guide, FRT stock’s payout seems to be more than safe.
Here’s the best part: Federal Realty Investment Trust has raised its quarterly dividend to investors every year for 51 consecutive years. That gives it the longest dividend hike streak in the entire REIT industry. (Source: “Dividend Information,” Federal Realty Investment Trust, last accessed July 2, 2019.)
And thanks to the company’s rock-solid financials, it should have no problem continuing that track record. Based on dividend announcement patterns in previous years, Federal Realty stock is well positioned to declare its 52nd consecutive annual dividend increase in August 2019.
Oasis Midstream Partners LP
If you think the previous two dividend growth stocks aren’t generous enough in terms of their current yield, this one should make you happy: Oasis Midstream Partners LP (NYSE:OMP).
Oasis Midstream Partners is a master limited partnership (MLP) headquartered in Houston, Texas. As an MLP that owns, operates, develops, and acquires midstream energy assets, OMP stock does not make many headlines in the financial media. However, it does offer a distribution policy that most stocks can’t even come close to.
With a quarterly distribution rate of $0.47 per unit, Oasis Midstream Partners LP provides investors with an annual yield of 8.4% at the current unit price.
Of course, in this day and age, high-yield stocks don’t really have the best reputation when it comes to dividend safety. But Oasis Midstream stock doesn’t have any problem covering its oversized payouts.
In 2018, the partnership generated $59.3 million in distributable cash flow. Its declared cash distributions, on the other hand, totaled $49.2 million for the year. That resulted in a distribution coverage ratio of 1.2 times, leaving a wide margin of safety. (Source: “Oasis Midstream Partners LP Announces Year Ended December 31, 2018 Earnings,” Oasis Midstream Partners LP, February 26, 2019.)
In the first quarter of 2019, Oasis Midstream Partners LP earned $26.2 million in distributable cash flow while declaring $16.1 million in cash distributions. Therefore, it achieved a payout ratio of 1.6 times, indicating that the payout was even safer than before. (Source: “Oasis Midstream Partners LP Announces Quarter Ended March 31, 2019 Earnings,” Oasis Midstream Partners LP, May 7, 2019.)
And rather than paying a steady distribution, OMP stock’s payout has been on the rise. Since the partnership’s initial public offering in September 2017, management has raised the payout every single quarter.
That’s right; while the most well-known dividend growth stocks tend to reward their shareholders with annual dividend increases, this little-known MLP has been mailing out bigger distribution checks to unitholders every three months.
Going forward, the partnership plans to increase its cash payout by five percent each quarter while also improving its distribution coverage. According to the company’s latest investor presentation, management expects that, by the fourth quarter of 2019, the partnership’s distribution coverage ratio could reach as high as 1.9 to 2.0 times. (Source: “May 2019 Investor Presentation,” Oasis Midstream Partners LP, last accessed July 2, 2019.)
Based on management’s projected distribution growth rate, OMP will likely announce a quarterly cash distribution of around $0.49 per share in August 2019. In other words, this energy partnership, which already yields 8.4%, is ready to pay out even more.