Clients owning shares of Procter & Gamble over the course of several decades would have the potential start of a comfortable retirement by now. The maker of Tide laundry detergent, Gillette razors and dozens of other products people encounter daily, has raised its cash dividend for 59 consecutive years and generated gains for long-term holders.
Clients, however, can have more immediate benefits from consistent dividend increases over the short term.
S&P Dow Jones Indices categorizes Procter & Gamble (PG) as a "Dividend Aristocrat," meaning that it has had 25 or more consecutive years of dividend increases. General Electric (GE) used to be in that group for increasing its dividend 32 consecutive years. GE kept it steady in 2008, and slashed it the following year because of trouble in its finance unit.
Most company boards at firms with a history of long-term, dividend-increases try very hard to maintain their preferred status as Dividend Aristocrats, or NASDAQ's shorter-term "Dividend Achievers," for 10 years of consecutive increases.
Just as an object in motion tends to stay in motion, a dividend increase series tends to continue. Here's how that may play out well for recent buyers of these stocks, or funds that own them.
There are currently 52 Dividend Aristocrats in the S&P. You can buy them as a unit in ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which weights each stock equally, unlike the cap-weighted S&P. This is not a portfolio you would buy for clients seeking current income. The ETF recently yielded 2.1%, not much more than the basic S&P.
But it pays to look under the hood. Even though dividends can be cut and S&P's Dividend Aristocrats are not the source of overly generous current cash, long-term payers can also be good dividend growth stocks.
Overall, the 52 stocks in NOBL have generated average annual dividend growth of about 9.5% over the past five years. To put that in perspective, the average dividend growth for a single year has been greater than the 8.7% increase in the consumer price index over five years. That's pretty good inflation coverage.
SOMETIMES ONLY PENNIES
Of course, it doesn't mean that every stock with a good increase record will be a stellar dividend grower. Consolidated Edison (ED), the New York-based utility, has increased its payment to shareholders for 41 years in a row. Yet, most years the increases are measured in pennies and the company's dividend growth has averaged about 1% annually for a decade.
In fairness, many shareholders own the stock because of its 4.1% yield, not for dividend growth. But the point is that not all long-term dividend increasers are cut from the same cloth.
As we've seen, the average dividend growth of 9.5% is an attractive aspect of stocks with long records of payment increases. Should that growth rate persist, and again nobody can guarantee that, the amount of cash generated by the group would double in a little more than 7.5 years. And that is something that should please more recent buyers of these stocks.