Bigger isn’t always better when it comes to dividends. Deutsche Bank recently pointed out “the first half of 2018 has seen the sharpest underperformance of dividend stocks since the financial crisis”, as measured by the Dividend Aristocrats.
Most readers are already familiar with this group of 53 names within the S&P 500 index, many paying out billions of dividends each quarter, with the most common trait being they’ve each boosted payouts a minimum of 25 consecutive years.
However, another item several of the Aristocrats share in common, is that the Law of Large Numbers is catching up to them.
They may be paying out more to investors each year, but as my colleague Brett Owens has often pointed out, it’s how much the dividend is growing that is the best predictor for building wealth over time.
This is especially the case when interest rates are rising.
An annual payout increase of a penny or two may produce a positive headline and keep you in the Aristocrat club another year, but these three names are barely treading water against other income investments and certainly not keeping up with the 7.2% average year-to-date dividend growth in the S&P 500.
AT&T (T) is the poster child for Aristocrat laggards with a high 6.1% yield, but decelerating dividend growth. This is one of a few potential reasons why the telecom utility is down 13% this year, more than offsetting the income benefit.
Annual Dividend Creep
Ma Bell increased its dividend earlier this year by a penny a share, as it has done each year for the past decade. However, here’s where the Law of Large Numbers kicks in: a 2.5% dividend increase in the midst of the financial crisis is a pleasant surprise, while a 2% boost in a rising rate environment is barely a blip on the radar when growth is at a premium.
The company recently acquired Time Warner and is yielding more than twice as much as the benchmark 10-year U.S. Treasury note. However, investors looking toward the upcoming earnings report on July 24 as a potential catalyst should note that management has exceeded profit expectations just two of the past eight quarters.
Cardinal Health (CAH) is a name we’ve previously panned on this site and has cost investors another 16% in 2018. One tip off to the company’s lagging ways can be seen in the deceleration of its dividend growth the past couple of years.
Slow Money Burn
After a 16% payout boost in 2016, the drug and medical products wholesaler has slowed its annual dividend growth to just 3% in 2017 and 2018. One reason for the paltry increase is that analysts expect Cardinal Health’s earnings to decline 8% this year.
The company’s profit outlook took another hit in June when Amazon.com (AMZN) bought privately-held online pharmacy PillPack. Wholesale margins are already notoriously thin and Amazon has proven a willingness to sacrifice near-term results to squeeze out the competition and win market share.
Wal-Mart (WMT) manages to combine the slow annual dividend creep and pressure from Amazon into one package. The retailer yields 2.4%, which has done little to cushion the 10% the stock has lost this year.
Retailer Requires Resuscitation
The company has increased its payout by just a penny a share the past few years, with the last boost representing less than 2% growth.
As far as Amazon is concerned, it is doing to Wal-Mart what Wal-Mart did to smaller retailers for decades. While it can attempt to copy the Prime business model, the retailer has the extra added cost of operating more than 11,000 physical stores across the globe.
— David Peltier
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Source: Contrarian Outlook