Dividends That Keep on Growing

By Jeffrey R. Kosnett
Kiplinger’s Money Power

       Thanks to two catastrophic bear markets over the past dozen years, the strategy of buying stocks and holding them forever has fallen into disfavor. But that doesn’t mean a buy-and-hold investing strategy is all bad; it just needs some tweaking. So in that spirit, allow us to introduce a variation that we think makes a lot of sense. Call it “buy and hold and collect and grow,” or BHCG for short.
       The strategy is simple: You buy stocks that regularly boost their dividends and hold for the long haul. By doing so, you hitch a ride with cash-rich businesses that generate higher revenues, profits and cash flow year after year. The best of these companies are committed to boosting their dividends by double-digit percentages in all economic and market cycles.
       BHCG stocks don’t necessarily pay superhigh dividends, as does AT&T (T), with its lavish 5.9-percent yield. But current income isn’t the point. Rather, the idea is to target companies whose share prices rise steadily along with their dividend streams. If the strategy works as you expect, you earn a handsome yield based on the price of your initial purchase.
       Some experienced investors believe BHCG offers the best mixture of safety and opportunity. One of them is Tom Cameron, who entered the investment business in 1953. Now head of Dividend Growth Advisors, in Ridgeland, S.C., and co-manager of Dividend Growth Trust Rising Dividend Growth Fund (ICRDX), Cameron requires any stock he buys to have annualized dividend growth of at least 10 percent over the previous 10 years. When he talks with company bosses, Cameron says, he makes sure big dividend increases are “part of the culture.” In 2008, Cameron, 84, dumped all of his shares of Bank of America after the company halved its quarterly payout. BofA shares traded at $28 at the time. They recently fetched about $6.
       To see how dividend growth and share-price appreciation work in tandem, study McDonald’s (MCD). In 2001, Mickey D’s paid out 23 cents a share in dividends on a stock that averaged about $30 a share, for a yield of 0.8 percent. In 2002, McDonald’s raised its annual dividend to 24 cents. Then the company’s fortunes improved, and McDonald’s decided to give more generously to its shareholders. By 2006, the rate was $1 a share. After a 15-percent boost in November 2011, the Golden Arches now pays at a rate of $2.80 a year. That’s a 1,100-percent increase since 2001, or 28 percent annualized, the highest of any company in the Dow Jones industrial average.
       Editor’s Note: Jeffrey R. Kosnett is a senior editor at Kiplinger’s Personal Finance magazine.