Since 2008, AT&T has established the custom of raising its quarterly dividend by a penny per share, or $0.04 annually. That pattern has taken the $1.60 dividend in 2008 up to $1.88 here in 2015. The slow rate of dividend growth during these past seven years has served an important purpose: It has given AT&T the chance to increase the amount of its annual profits that aren’t earmarked for dividends. Retained earnings are in important ingredient in establishing future growth because it represents the available cash to sink into new initiatives without having to borrow from banks or dilute shareholders.
For a company with a wildly impressive track record of rewarding shareholders, Best Buy sure is an ugly company. Since 1985, Best Buy has compounded wealth for shareholders at a rate of 20.58% annually for shareholders. Yes, this is a company that has been even better than the quintessential dividend stock of the Old Philip Morris, which has rewarded shareholders with huge dividend checks that now come from Altria, Philip Morris International, Kraft, and Mondelez. A mere $10,000 invested into Best Buy in 1985 would be over $2,612,000 today. Millionaire status could have been reached with a mere $3,850 investment in Best Buy.
From 1926 through 1991, a company called Eastern Airlines flew an unofficial monopoly over the northeasterly American skies. Headquartered in Miami, it was one of the “Big Four” airlines and featured hubs in Chicago, Orlando, and Tampa Bay. During the 1960s and 1970s, it had an extended period of delivering shareholders very good returns at a rate of 15.2% annually. That was because the company was reporting earnings per share growth of 13% and paid a small dividend, and investors were enamored with the stock. Around the mid-1980s, the stock started trading in the valuation range of 10-13x earnings, leading many people to think that the stock was cheap and worthy of purchase for the value investor.
With BP on my mind after writing last night’s article, I was once again a bit surprised to study the full effects that dividend payments can have—not just in terms of total returns—but also in providing a cushion against the next fall in the price of stock. The list of companies with worse PR issues than BP is indeed short, and people who remark that the price has little changed since 2010 are, of course, right.
But here is what I see: $1.68 in 2011 dividends, $1.98 in 2012 dividends, $2.19 in 2013 dividends, $2.34 in 2014 dividends, and (projected) $2.40 dividends in 2015. The price at both the start of 2011 and the middle of March 2015 may be $40 per share, but the underlying reality is this: You will have collected $10.59 in dividends by the end of this year. To sustain a paper loss, assuming you bought at $40 at the end of 2010 or before the first dividend payment of 2011, you would need to see BP trade at a valuation of $29.41 or less. And that is assuming you collected the dividends as cash—the amount that BP stock could plummet towards would be even more substantial if you had been reinvesting your dividends during the past five years instead of having the payments pile up in a cash account.
When people talk about the checklist of elements that make for a good investment, one of the things you will invariably hear people say is this: Good management. Find companies that are being run by intelligent, forward-thinking people that can anticipate what will come and the risks posed in the future, and you will do well knowing that you entrusted your capital to good hands. The problem with this? A lot of times, talking about good management is a mere platitude and not something that you can actionably make decisions based on—if you visit a corporate website, you will see a lot of people looking regal in their suits accompanied by a list of impressive-sounding academic credentials coupled with two decades of jobs sounding like they involved a lot of responsibilities.