Three 3%+ Yielders With 20 Consecutive Years Of Dividend Growth

By Valuentum Analysts

A company raising its dividend in each of the past 20 years is no small feat, as even the strongest companies may stumble every now and then. Companies may experience a product miscue, have a recession hit their business a bit too hard, or encounter a management team that leads the business astray, where pausing dividend growth or cutting the dividend may make sense.

In order for a company to raise its dividend for the past 20 consecutive years, that means that the company would not only have had to raise its dividend through the Great Financial Crisis of 2007-2009, but also through the calamitous environment of COVID-19. These last 20 years have had some difficult times, with perhaps the worst financial crisis since the Great Depression and the worst health crisis since the Flu Pandemic of 1918.

But in this article, we didn’t want to just highlight companies that have inched their dividends higher very modestly every year, but rather we wanted to find those companies that have grown their dividends meaningfully, to the point where they now have solid dividend yields to deliver for investors. Several companies fit the bill of 3%+ yielders with 20 consecutive years of dividend growth, and we’ve selected three of them below for further examination.

When IBM announced its quarterly dividend in April of last year, the news marked the 27th consecutive year the firm raised the payout. The company managed to keep its dividend growing, too, despite spinning off Kyndryl (KD), and IBM continues to optimize its business.

During its third quarter 2022, results released October 19, IBM’s sales advanced 15% on a constant-currency basis, as the company experienced strength across its software, consulting, infrastructure and hybrid cloud revenue streams. The revenue growth is welcome news, as IBM has struggled to right the ship in recent years.

Year-to-date through the end of its third quarter 2022, IBM generated free cash flow of $4.1 billion, and management expects a very strong fourth quarter to drive free cash flow significantly higher for the year (in its third-quarter 2022 press release, for example, management said it expects $10 billion in consolidated free cash flow for all of 2022).

Based on the firm’s quarterly dividend run-rate of $1.5 billion, which it paid during the three months ended September 30, 2022, forward annualized expected cash dividends paid amounts to an estimated ~$6 billion, so the annual free cash flow generation looks to be sufficient for adequate coverage. Investors still have to worry about IBM’s net debt position, however, which stood at $41.3 billion at the end of September. Shares yield an attractive ~4.7% at the time of this writing.

Realty Income (O)

Retail REIT Realty Income is a fan favorite, and it just so happens to meet the criteria of this screen, too. Since its last dividend declaration in January 10, 2023, the REIT has increased its dividend 118 times since it was listed in 1994. We like the “Monthly Dividend Company” though we do note that there are risks related to investing in REITs, more generally.

REITs pay out the vast majority of their net income to shareholders in the form of a dividend, and this makes them a bit more exposed to exogenous shocks than the typical corporate. In our work, “Why Are the Dividends of REITs So Risky?,” we explain how REITs have generated a weak total return during the past eight years, as more than 100 of them cut their payouts over this time period, too.

REIT investing is not for the faint of heart, in our view, and investors should understand how the dividend fits within the investment, total return, and valuation framework. For starters, investors already own all the cash that would be stored on the books (balance sheet) of a company as ownership of the stock means investors have a claim on all the assets of the entity. That means that investors already own the dividend before its paid (as the dividend is paid from cash from the balance sheet).

Dividends, therefore, should be viewed as capital appreciation that otherwise would have been achieved had the dividend not been paid. This is why we think Warren Buffett isn’t a huge fan of dividends. By keeping that capital in-house, Buffett is further able to compound Berkshire Hathaway’s (BRK.A) (BRK.B) long-term returns. Whereupon had Berkshire paid out dividends, it would have actually decreased the value of the firm–not only as cash is eroded from the balance sheet (and equity value is directly reduced), but also in that such cash would not be available to put to use to generate even more free cash flow growth (“intrinsic value”) in the future.

Regardless of one’s take on the dividend, however, Realty Income is one of our favorite dividend-paying REITs as it has treated investors quite well over its corporate history. In the future, the REIT will have to contend with rising interest (cap) rates, a difficult environment for retail in the long run given e-commerce proliferation, and tight financials, but so far so good for Realty Income. Shares yield of ~4.5% at the time of this writing.

Clorox (CLX)

Clorox is a company that just about everyone knows. Demand for its cleaning products really took off during COVID-19, as consumers just couldn’t get enough of them. But the spread of COVID-19 also accelerated the entrants of rivals and pricing competition for its products, as the free market saw a need for more and more cleaning supplies. What all this has translated to for Clorox is flat returns, on a price-only basis, during the past 5 years.

Clorox’s traditional free cash flow generation has also faced pressure. In fiscal 2020, cash flow from operations came in at $1.5 billion, but this level was halved during fiscal 2022 (ends June 30, 2022), while capital spending was about the same in both fiscal years. Free cash flow for fiscal 2022 was $535 million, which came in below cash dividends paid to Clorox stockholders over the same time period of $571 million. Clorox also ended fiscal 2022 with a net debt position $2.5 billion.

Clorox’s free cash flow relative to cash dividends paid is cutting it pretty close, and that’s why the firm registers a Dividend Cushion ratio at about parity (1), by our estimates. We generally like dividend payers that can generate free cash flow far in excess of cash dividends paid and have huge net cash positions, but Clorox just doesn’t fit the bill, in this case. When the company reported first-quarter fiscal 2023 results in November, however, cash flow from operations was up considerably ($178 million versus $41 million in the year-ago period).

We think Clorox has a lot of work to do to right the ship, but operating cash flow is improving, and the firm is working hard to manage inflationary pressures, supply chain disruptions as well as demand volatility. Pricing initiatives will also help, to a degree, though gross margins still faced pressure during the first quarter of 2023. It’s hard not to like Clorox’s track record of raising its dividend in each of the past 20 years, however. Shares yield ~3.3% at the time of this writing.

Concluding Thoughts

A company that has raised its dividend in each of the past 20 years has done a lot of things right. IBM expects a very strong fourth-quarter 2022 in terms of free cash flow generation, something that it will need in order to continue to cover its dividend payout for the year. IBM also has a large net debt position that is worth monitoring. Realty Income is facing the same headwinds as those of others in the REIT sector, and it remains very capital-market dependent, by its very nature of having to pay out most of its net income as dividends. Clorox has a lot of work to do to get things back on track, but its brand name and long-term dividend growth track record speak of resilience. These three ideas are at the high end of the risk spectrum, in our view, but each should be proud of having endured a very difficult 20-year period with their consecutive dividend growth streaks intact.

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