Durable Dividends

Finding Peace of Mind With Predictable Dividends

Nick Ward

56 postsFebruary 6, 2022

Throughout 2022 thus far, we’ve seen an immense amount of volatility in the markets.

Most of it has been the bearish variety, which is scary to many investors.

The red results that we’ve seen the major averages put up on a year-to-date basis, alongside potentially fearsome headlines regarding the pandemic, geopolitical strife, and ongoing economic uncertainty (largely revolving around central bank policy), is likely more than enough to cause anxiety in even the most hardened investors.

The fact of the matter is, no one can predict short-term market movement.

Generally speaking, short-term volatility is driven by sentiment (not fundamentals) and It’s a fool’s errand to attempt to predict its direction.

But, while I believe that predicting short-term volatility is impossible, I do believe that it’s possible to arrive at pretty accurate estimates for the future dividend growth of mature, blue chip dividend growth stocks.

I’ll be the first to say that I don’t have any idea what the market is going to do tomorrow, or over the next week, or month, or year even. However, historically speaking, I have a great record when it comes to predicting dividend growth.

Really, predicting dividend growth comes down to determining appropriate payout ratios and accurately estimating future earnings growth.

Now, nothing that involves looking into the future is foolproof.

It requires a lot of work to stay on track of a given company’s competitive position (relative to its peers), to monitor demand trends and disruptive threats (both of which impact margins), to follow along with plans for capital expenditures or mergers and acquisitions or share buybacks – all things which could impact outstanding share counts and therefore, per-share profit related metrics – ultimately, allowing me to predict free cash flows and earnings per share, which are what support sustainably increasing dividends.

From there, I have to determine acceptable payout ratio levels, on an industry-by-industry and company-by company basis. With estimates in place for earnings and target payout ratios in place, predicting dividend growth comes down to a series of fairly simply mathematical equations.

Yes, unforeseen disruptions can occur and this is why my forward earnings estimates (and therefore, my dividend growth projections and fair value estimates) ebb and flow over time, as fundamental data and outlooks change.

But, at the end of the day, this is a data driven process which means that it’s possible to remove a great deal of the emotion that might otherwise result in irrational bias and impact sentiment. In other words, it’s possible for a disciplined investor to do the work and predict dividends with a fairly high degree of accuracy.

This is especially the case when well respected management teams of blue chip dividend growth companies provide forward operational guidance and/or target payout ratios, with regard to the levels where management and the board of directors feel comfortable returning cash to shareholders.

No one knows a company’s competitive position and its growth prospects better than insiders.

This week I wrote an in-depth report on the railroad industry for subscribers to iREIT on Alpha and that piece ended up inspiring this one.

One of the companies that I covered was Union Pacific, which is the best-in-breed class-1 U.S. railroad (in my opinion) and a well known dividend grower.

UNP is on a 15-year dividend growth streak. The stock yields 1.95% and boasts 5-year and 10-year dividend growth rates of 13.7% and 16.1%, respectively. UNP provided investors with two double digit raises in 2021 alone. Without a doubt, this is a wonderful dividend growth stock.

During UNP’s recent Q4 earnings report, the company re-confirmed the prior guidance that it provided during its 2021 Investor Day presentation (regarding its profitability goals, share repurchase plans, target operating ratio, target margins, and lastly, its target dividend payout ratio), meaning that investors have all of the information that they need to attempt to predict dividend growth.

Union Pacific claims that it hopes to pay out 45% of earnings to shareholders in the form of a dividend.

During 2021, the company posted earnings-per-share of $9.95 and paid out $4.29 in dividends – representing a 43.1% payout ratio.

Moving forward, management believes that they can generate a low-double digit earnings growth CAGR from 2022-2024.

Looking at the consensus earnings-per-share estimates that Wall Street has for UNP at the moment, we see expectations of 16% in 2022, 11% in 2023 and 8% in 2024, which, if accurate, would represent an 11.63% 3-year CAGR (right in-line with management’s expectations).

It appears that the 3-year guidance is being front loaded because of the ongoing rebound that analysts expect to see as the world continues to emerge from the COVID-19 recession and the fact that the supply chain issues which have hurt west coast (where UNP operates) logistics operations throughout 2021 are largely expected to be resolved in the coming year.

So, with 16% EPS growth expected in 2022, all we have to do to estimate UNP’s forward dividend growth rate is to multiply 2021’s $9.95 EPS total by 1.16 to arrive at a 2022 EPS estimate ($11.54). Then, to figure out the forward looking dividend, we have to multiply $11.54 by 0.45 (the target payout ratio of 45%)…resulting in $5.19. UNP’s current forward dividend is $4.72. Therefore, to estimate the 2022 dividend increase, we need to subtract $4.72 from $5.19 and then divide the difference between the projected future annual dividend ($0.47) by the current annual dividend ($4.72). Doing so gives us a total of 0.0996, which equates to a 9.96% dividend increase estimate.

Since this is all inherently speculative, we’ll happily round up to 10% for the sake of the discussion.

In today’s market environment, where the S&P 500 is yielding approximately 1.25%, I am pleased to buy shares of a company that offers a ~2% dividend when I believe that double digit dividend growth prospects are likely.

To me, this is a solid recipe for long-term compounding success.

And, since UNP has a history of beating analyst estimates on both the top and the bottom lines, I wouldn’t be surprised if the calculation that we just performed ends up being fairly conservative.

Due to the variables at play, I tend to think about dividend growth estimates in a range, instead of an exact estimate (no one can predict the future). So, when looking at UNP’s present results, forward looking guidance, and the macro environment which appears to support ongoing growth, I believe that UNP is likely to generate dividend growth somewhere in the range of 9-12% in 2022.

Only time will tell if I’m correct; however, even with an air of speculation involved, I hope that this article was useful to you.

Frankly, (as usual) nothing that we discussed here was rocket science.

As I’ve said many times before, the beautiful thing about the dividend growth strategy is its relative simplicity.

Mature blue chips are fairly predictable, when it comes to their operations (taking a look back at UNP’s earnings reports from the last several years, their reported EPS was typically only a few pennies off of the consensus analyst estimate). And, as shown above, their management teams are typically trustworthy. When UNP says that it hopes to pay out 45% of its earnings to shareholders, it will generally do so.

Therefore, during volatile times in the market, I continue to take solace in the relatively predictable results that mature, cash cow, blue chip dividend growth stocks offer.

If you’re someone like me who hates surprises…well, then this strategy might be a good fit for you as well.

Disclosure: Nicholas Ward is not long UNP; however, he may initiate exposure within the next 72-hours.

This article is intended to provide information to interested parties. As we have no knowledge of individual circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended. It does not guarantee that securities mentioned in this newsletter will produce profits or that they will equal past performance. Additionally, we are not an investment advisor and do not offer securities or tax advice. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. Nicholas Ward, contributors and staff members of Wide Moat Research may hold positions in some or all of the stocks listed.

Nick Ward

56 posts

View all my Posts

Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

Controversial Companies Report This Week

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Finding Peace of Mind With Predictable Dividends

Nick Ward

56 postsFebruary 6, 2022

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