Dividends Make It Easier to Hold On
The real-money Inflation-Protected Income Growth portfolio attempts to build an income stream that increases at least as fast as the rate of inflation. It does this by buying shares of companies that have a history of paying and increasing their dividends and that look like they have the potential to continue that trend.
Still, there are no guarantees in the market, and dividends can generally only be paid if a company is current on every other key financial obligation. While that makes dividends a somewhat risky proposition, it also makes a dividend an incredibly powerful signal of the true health of a company. Because a company's dividend, its coverage, and changes can tell you so much about the health of that company, they make it easier to hold a company's stock during periods of market volatility.
The difference cash makes
For instance, defense contractor Raytheon handed its shareholders, including the iPIG portfolio, a $0.55-per-share dividend since last week's update. Raytheon's dividend was 10% higher than the payment it made at the same time last year, but with a payout ratio of only 36% of earnings, it has room to continue raising its payments in the future. That well-covered and growing dividend from Raytheon stood in contrast to its stock price, which actually fell a bit last week.
Similarly, industrial-chemicals titan Air Products and Chemicals is handing its shareholders a $0.71-per-share dividend this week. That dividend is a tad more than 10% higher than the dividend Air Products and Chemicals paid at the same time last year, and with a 59% payout ratio, it also has some room to continue increasing its payment.
Looking out a little further to nextweek, toy maker Hasbro pays its dividend on Feb. 18. While weakness in the holiday season recently sent shares of both Hasbro and archrival Mattel down over the past few weeks, Hasbro's $0.40 dividend remains covered. The company's 70% payout ratio suggests that it will only really have room to raise its dividend if its own holiday earnings come in reasonably well.
Hasbro is due to report today and is expected to make a dividend announcement at about the same time, near the anniversary of its last increase. With that combination, the interplay between the company's announced results and projected dividend will send an incredibly powerful message. Weakness in the dividend combined with weakness in earnings would suggest the company expects the difficult times to continue.
On the flip side, a dividend that is too aggressive in light of earnings weakness would suggest that Hasbro may have become too focused om the short term. After all, a dividend takes cold, hard cash flow to support. If too large, the dividend could threaten a company's ability to invest in its own longer-term future.
Whatever happens, cash in hand stays there
While every investor looks to make money on his or her investments, the reality is that not every investment works out. Another advantage of a dividend is that once a company makes the payout to its investors, that cash stays with the investors. Any given dividend may not be a spectacular return itself, but it is a return that stays that way, no matter what the market does to the company's stock next.
Those dividends play a central role in the iPIG portfolio's investing philosophy. Thus far, it's working well, and as of the market close on Feb. 7, 2014, here's what that portfolio looks like:
Total Investment (including commissions)
Value as of
Yield as of
Dec. 10, 2012
Dec. 12, 2012
Dec. 13, 2012
Dec. 21, 2012
Mine Safety Appliances
Dec. 21, 2012
Dec. 26, 2012
Dec. 28, 2012
United Parcel Service
Jan. 2, 2013
Jan. 4, 2013
Jan. 7, 2013
Jan. 22, 2013
Jan. 22, 2013
Jan. 24, 2013
Jan. 31, 2013
Feb. 5, 2013
Air Products and Chemicals
Feb. 11, 2013
Feb. 22, 2013
April 3, 2013
May 30, 2013
June 21, 2013
Jan. 3, 2014
Data from the iPIG portfolio brokerage account, as of Feb. 7, 2014.
The No. 1 Way to Lose Your Wealth Without Even Knowing It
You've fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.
Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it's too late!
To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, simply click here.
The article Dividends Make It Easier to Hold On originally appeared on Fool.com.
Chuck Saletta owns shares of Aflac, Air Products and Chemicals, Becton Dickinson, CSX, Emerson Electric, Genuine Parts Company, Hasbro, J.M. Smucker, Kinder Morgan, McDonald's, Microsoft, Mine Safety Appliances, Raytheon Company, Teva Pharmaceutical Industries, Texas Instruments, Union Pacific, United Parcel Service, United Technologies, Walgreen Company, Scotts Miracle-Gro, and Wells Fargo. The Motley Fool recommends Aflac, Becton Dickinson, Emerson Electric, Hasbro, Kinder Morgan, Mattel, McDonald's, Mine Safety Appliances, Teva Pharmaceutical Industries, United Parcel Service, and Wells Fargo. The Motley Fool owns shares of CSX, Hasbro, Kinder Morgan, Mattel, McDonald's, Microsoft, Raytheon Company, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.