Friday, February 27, 2009

Rising Dividends Stocks in a Time of Falling Dividends

There has been lots of news lately about the number of companies that are cutting their dividends to preserve capital. In many cases, we believe these cuts make good economic sense when considering that capital and cash are kings and so hard to come by in the current economy. In spite of this, however, not all dividend news is bad. In fact in selected industry sectors there is a lot of good news. Those sectors with the most dividend hikes are in what we call the "essential services" sectors such as consumer staples, energy, health-care, and utilities. Companies in these sectors produce products that we use everyday. In most cases, we don't have to borrow money to buy them, and, in many respects, these companies and products have been woven into the fabric of our lives. In recent weeks eight of the companies that we follow have hiked their dividends. In the consumer staples sector Coke raised it dividend 8%, Sysco 9%, and Colgate surprised us with a 10% increase. In the energy sector, Kinder Morgan Energy Partners recently hiked its dividend on a year over year basis by 11%. In the health-care sector, Abbott Labs raised its dividend a greater-than-expected 11%, and FPL Group, a utility, also surprised us with a 6% increase. In addition to these companies in the essential services sector, there were two additional recent hikes among our holdings. Financial giant Chubb raised its dividend over 6%, and Praxair in the materials sector raised its dividend nearly 7%. You probably did not hear much about these hikes and that makes them even more significant. In this environment, dividend hikes are not being rewarded. Thus, these companies are raising their dividends for two very solid reasons: 1. Their earnings are growing and they are confident enough in their prospects, even in a slow economy, that they feel free to increase their dividends; 2. Almost all of the companies mentioned here have long histories of increasing their dividends. It is in their cultures. These are the kinds of companies we prize. They are in solid businesses that produce free cash flows from which they can pay dividends if they choose; they possess a track record of having been willing to share their financial successes with their shareholders; and they are confident enough with the unfolding events of the day to raise their dividends, even if no one cares but their shareholders. I'll keep you posted on other companies that are hiking their dividends. We own all of the companies mentioned here. Please do not use this blog for investment decisions. It is for information only.