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Investors focused on receiving income from their investments are always looking for opportunities to increase their dividend payments while also maintaining as much safety as possible.
Dividends are a great option for income because of their special tax treatment. Qualified dividends are tax-free for those in the lowest two tax brackets, and they get taxed at the capital gains rate above that. Dividends are also income that comes in regardless of what a person happens to be doing. They pay out whether you’re sleeping, eating, or working. It usually takes some labor to purchase the stocks that pay them out, but after you’ve purchased the stock, some level of dividend income will continue to come in as long as you’ve diversified your holdings effectively.
One company that’s seen its dividend yield increase in recent months is T. Rowe Price (NASDAQ:TROW). The current yield is higher than the company’s usual yield over the past few years (with the exception of years in which it’s paid out a special dividend). Dividend investors tend to like higher yields with safe companies, but there is also the issue of share prices, and TROW may be experiencing headwinds in the near term.
Dividend Payments
One sign that a company is a solid investment option is a history of steady or growing dividend payments. TROW has his covered. The company has increased its dividend every year since its IPO in 1986, according to its investor relations website. The company’s stock has also split five times over the same period. This means that investors who bought in 1986 would have 32 shares for each share they purchased, even without reinvesting dividends.
The dividend over the same period has grown from $0.01375 in 1987 (the first full year dividends were paid) to $4.32 last year. This latter number does not include a $3.00 special dividend shareholders received on July 7, 2021.
It’s frequently argued that the safest dividend is the one that’s just been raised. The most recent dividend increase was $0.12 a quarter, and it hit in March, so TROW investors can expect to receive $4.80 in dividends for 2022. This dividend increase was 11.1%, which was a little lower than the dividend increase in the previous two years. However, it is well in excess of the current stated rate of inflation. Those who need the cash to fund living expenses will not see their real income decrease, and those who are able to reinvest their dividends should see that income increase over time as their reinvestments compound their shares and dividends.
The dividend payout ratio is also quite sustainable at this point at only 38.83% of earnings, based upon the last 12 months of earnings. The estimate is 47.71% of current-year estimates, which is still quite safe. The current yield is 4.1%, which is about double what it has been in in recent years when basing the yield on regular dividends (i.e., this excludes irregular special dividends). Therefore, based upon the dividend alone, T. Rowe Price would appear to be a solid option for dividend investors.
Financials
Those looking at the share price will note that it’s lost nearly half of its value since its all-time closing high of more than $222 that was set last August. Indeed, this year has been a bloodbath for those who’ve held TROW. The price briefly dropped below $107 on June 16, before quickly rebounding to its current $116.82 (as of closing on July 6). Year-to-date, the stock is down nearly $80, or 40.3% just since January.
The most recent quarterly report showed that the company had $1.55 trillion under investment in its mutual funds and other financial instruments. The company reported $1.9 billion in net revenue and EPS of $2.41 for the quarter.
The concerning numbers are tied to investment advisory fees and net income, both of which were down when compared to the same quarter in 2021. Investment advisory fees were down by 1.5%, while net income and EPS were both down to the tune of 24%.
The company’s CEO noted the recent pullback in major indexes over the past few months, the recrudescence of the COVID-19 pandemic, and the Russian invasion of Ukraine as headwinds that impacted the company’s recent price decline. Even with that, TROW’s net revenue increased by 2% over the same quarter a year ago.
In addition to the dividend growth that’s continued since the IPO in 1986, the company bought back 2.1 million shares of its own stock over the first quarter. This has a positive impact on long-term earnings per share because there are fewer shares outstanding to spread the dividend and the EPS around to. Fewer shares will limit the impact of dividend increases to the company’s bottom line, and it will increase the relative ownership position of current shareholders.
Conclusion
In the past year, the stock of T. Rowe Price has performed poorly, even when compared to the S&P 500 as a whole. The company is down nearly 50% from its all-time closing high. However, it continues to bring in a solid profit that well exceeds its dividend payment. The company’s P/E ratio, which is currently 9.98 is lower than some similar companies like Charles Schwab (SCHW), which would indicate that it is closer to being a bargain.
The current dividend yield is solid, and the company’s dividend growth history combined with the current payout ratio indicates that its dividend growth may be able to exceed the current high level of inflation in the near term. However, with the economy possibly in a recession right now, there may be less money for investors to put toward their retirement funds and other investments. This could hurt share prices and the company’s underlying success in the near term.
As a long-term investment, TROW is likely a winner. In the short term, however, its performance might be constrained by some of these major headwinds. Those concerned primarily with dividend income might look to buy, as might those who are looking for long-term capital gains. On the other hand, those looking for a quick profit might want to hold off.
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