Many dividend investors are under the mistaken impression that a company which can pay an increasing dividend each year should be able consistently increase dividends indefinitely. Unfortunately not all dividend increases are created equally.
In order for a company to be able to consistently increase a dividend, it fundamentally needs to grow operating earnings and operating cash flow. An inability to grow either of these over an extended period of time will ultimately impact the ability of a company to increase its dividend to shareholders.
It is still possible for a company to increase its dividend for quite some period of time even though operating earnings growth has stalled. A business can decide that it is going to pay out an increasing amount of its earnings in the form of dividends and just reinvest less in the business. In such a scenario, I view dividend growth as temporary and unlikely to continue over the long term.
You can read the rest of my article here on Seeking Alpha if interested.
I agree completely. This is why I stick to large cap dividend payers. I know I am giving away some growth potential but I like to sleep well at night. I like taking low risks and am willing to see my results compound overtime.
Tough to argue with that Marvin. I’d gladly sacrifice a few points of return to be a happy and contented investor!
That’s why it’s so important to look beyond the EPS number. It’s easily manipulated and buying back shares can give the illusion of growth. The cash flow is much more important to determine the safety and quality of a company.
I agree JC. EPS can give you the impression that a company is growing, when its actually just being boosted by stock repurchases. Ideally, you want to see increasing revenue, and cash flow over an extended period of time. Without revenue or cash flow growth, its going to be very difficult to sustain dividend increases long term.