The news did not come as a shock.
I found out last Tuesday when I checked my messages.
I had a notification waiting for me from a subscriber.
He informed me that the “stock darling” my fellow analysts in the market had touted to buy… just cut its dividend.
Now before I tell you what stock it was, let’s examine what I had been saying for months about this company.
On September 12, 2022, I wrote:
“The payout ratio – based on AFFO [adjusted funds from operation] per share – is not covered in 2022, and this is especially troubling because of the company’s outsized office exposure (requires more cap-ex when tenants turn over).”
On October 28, 2022, I explained:
“How can a business not grow its dividend for such a long time? Furthermore, risks are elevated[…] post-pandemic as the demand for office space has decelerated.”
And on December 18, 2022, I wrote:
“This earnings profile is as flat as a pancake! Why would you want to invest in any company that’s not growing?”
The warning signs were all there… but many still did not believe me.
Today, I’ll share with you the name of the stock for which I saw the writing on the wall. I’ll also tell you about other stocks I’ve warned people in advance about.
And by the end of this essay, I hope you’ll see why – if you’re an income-focused investor like us – you should focus on companies that have sustainable and growing dividends in this bear market.
Not a Dividend Darling
As income investors, we always say “the best dividend is the one that was just raised.”
And the worst? The one that gets cut.
Not only does it mean less income in our pockets… it’s also an indicator of bigger underlying problems at the company.
So what, you may ask, was the company I referred to above?
Gladstone Commercial (GOOD). “Your diversified net lease REIT [real estate investment trust]” as they advertise.
To be fair, this REIT owns an impressive portfolio of 121 properties in 28 states. And it had an average remaining lease term of 7.3 years… occupancy of 95.3%… a market cap of $647 million… and an enterprise value of $1.4 billion.
But on January 10 this year, it announced a 20.3% dividend cut. Dropping the payout from $0.13. to $0.10 per share.
And the market reacted as expected… the share price dropped almost 14% by the end of the next day.
So how did I see this coming months in advance?
Lack of dividend and earnings growth.
Back in May 2021, I wrote:
“Buyer Beware. While the 7.2% dividend yield may look appealing, keep in mind that GOOD has not grown its dividend in over 13 years. More so, the payout ratio is at high risk and the lack of earnings growth is alarming.”
And in July 2021, I explained:
“Gladstone Commercial (GOOD) is a net lease REIT that has an AFFO [adjusted funds from operations] payout ratio of 104%. This means that the company is at high risk of a dividend cut. We have a SELL rating on the company.”
As in the case with Gladstone Commercial, high dividend payers with more financial leverage (high cost of capital), lower profitability, and lower earnings growth are much more likely to cut their dividends in a volatile, low-growth market.
Alternatively, dividend growers (like the companies we recommend at Wide Moat Research) generally tend to show greater resilience in unsteady markets, allowing our members to live stress-free and sleep well at night.
It Isn’t the First Time I’ve Been Right
As part of our research, we let our readers know when we believe a company could cut its dividend. And I must say our track record is pretty darn good.
We were able to spot some trainwrecks ahead of time with companies like…
- EPR Properties (EPR)
- Macerich (MAC)
- CBL Properties (CBL)
- PREIT (PEI)
I recommended my subscribers sell all the above month(s) prior to the formal announcements of their dividend cuts.
But more important than identifying the dividend cutters, our team is focused on spotting the best dividend growers for your portfolio.
Why We Focus on Dividend Growth
At Wide Moat Research, we’ve found that companies that grow their dividends are naturally going to outperform…
And this is a very important point. Many investors chase after high dividend yield… when they should be paying closer attention to sustainable dividend growth.
According to S&P, “High dividend yield does not necessarily signal financial strength or discipline, as there are cases when new or in-trouble companies attempt to attract market participants by going into debt just to pay shareholders.”
Dividend growers (tracked in the S&P Dividend Aristocrats Index, which includes companies with 25 or more years of dividend growth) cut their dividends by 7.2% in 2019 and 2020. That compares to 36.1% for the high yielders (tracked in the S&P 500 High Dividend Index).
That’s how we know in a bear market, dividend growers are much more important than high yielders.
And that’s why we at Wide Moat Research recommend an overweight allocation to companies that have sustainable and growing dividends.
Over time, they provide exposure to high-quality stocks and greater income, buffer against market volatility, and address the risk of rising rates to a greater extent.
Whenever a company is reliably able to boost its dividend for years or even decades, this suggests it has a certain amount of financial strength and discipline.
The Safest Dividend Is the One That’s Just Been Raised
I didn’t coin this phrase “the safest dividend is the one that’s just been raised,” but I certainly use it a lot these days. That’s because many of our top recommendations at Wide Moat Research have been boosting their dividends.
To be clear, just because a company opts to raise its dividend doesn’t always mean it’s a healthy investment model. But the exceptions are few and far between.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily
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Source: Wide Moat Research