Friday, August 12, 2016

Dividend Growth Investing at Work - One More Increase From July

Something I love about dividend growth investing is that each month I get to hear about companies I own deciding to pay me more money in dividends.  Just for owning a small portion of said companies.  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  That's dividend growth investing at work!  I mean who doesn't like getting a raise for doing nothing?  Dividend growth investing is far from a get rich quick investment strategy, rather you need to remain focused on the long term goal to be successful.

I missed this increase announcement last week, but I'll take it nonetheless.  Of course it was already announced what the dividend was being boosted to when the latest round of bank stress test results came out, but it wasn't officially declared.  


On Wednesday, July 27th the Board of Directors of Bank of America (BAC) made a long awaited increase to their dividend payment.  The new dividend is $0.075 per share compared to the previous payout of $0.05.  For those keeping score at home that's a 50% increase!

This is just the 2nd dividend increase that Bank of America has made since slashing it down to $0.01 during the financial crisis in 2009.  Shares currently yield 2.07%.

Since I own 161.817 shares of Bank of America in my FI Portfolio this raise increased my forward 12-month dividends by $16.18.  This is the 2nd dividend increase I've received from Bank of America since initiating a position in September 2011.  That's not the most consistent of dividend growth, but the raises have been fantastic.  

Cumulatively my income from Bank of America has increased by 650%!!!  According to USInflationCalculator the total rate of inflation over the same time period is just 7.2%.  While Bank of America might not be consistent at least the raises are crushing inflation.

I also own 102.681 shares of Bank of America within my Roth IRA.  The dividend increase boosted my forward 12-month dividends by $10.27.

Looking at the dividend history Bank of America isn't exactly a dividend growth investors dream company.  The dividend was slashed to essentially nothing in 2009, wasn't raised for 5 1/2 years and then idled again for another 2 years.  There is a bit of a bright spot in that chart though and that's the consistency of dividend increases from 1993 through 2008 which is a sign of the potential for Bank of America or at least a willingness to become a steady raiser.

Bank of America (BAC) Annual Dividend and Growth Rates Since 2001
Bank of America (BAC) Annual Dividend and Growth Rates Since 2001
Prior to the dividend being slashed it had grown nicely year after year.  10%+ raises were the norm until the financial crisis was in full swing.  Surprisingly enough despite Bank of America's lack of steady increases they've amassed a 3 year growth streak assuming the 4Q payment is at the new rate.

The above chart shows the payout ratio based off earnings per share from 2006 until 2016.  The 2016 payout ratio is calculated assuming a 4Q dividend payment of $0.075 and the mean analyst earnings estimate of $1.34 for 2016.

Many people have written or sworn off Bank of America as an investment and understandably so.  However, there's definitely potential here especially for dividend growth investors.  

Bank of America is a potential gold mine for income investors although the ride is likely to be very bumpy.  Analysts are expecting 7% annual growth of earnings over the next 5 years.  That alone would be fantastic, but Bank of America is likely to increase their payout ratio more in line with their peers.  

Banks typically payout somewhere around 40-60% of earnings as dividends to shareholders.  However, Bank of America's payout ratio for 2016 is only expected to be around 19%.  That leaves the potential for a doubling or tripling of the current dividend just to reach the typical levels.  

The following table shows the potential dividend based off the earnings estimates through 2021 and varying payout ratios.


Bank of America (BAC) Potential Dividend Payments Based off Payout Ratios
Bank of America (BAC) Potential Dividend Payments Based off Payout Ratios
This is a rather cursory look at the potential dividend growth that could be coming down the line.  I don't expect to see raises quite this generous because share repurchases will still be a huge draw for excess cash within the company.  

However, there's very few companies that have the potential for dividend growth even approaching this while paying a meaningful dividend.  Also it needs to be said that Bank of America must still get their capital allocation plans, dividends and share buybacks, approved by the Federal Reserve.

Wrap Up


My forward dividends increased by $16.18 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 2.97% this raise is like I invested an extra $545 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way.  

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

For a dividend growth investor there's not much that's better than hearing news of a dividend increase.  So far this year I've received 33 increases from 27 companies increasing my forward 12-month dividends by $191.39

My FI Portfolio's forward-12 month dividends increased to $5,637.78.  Including Loyal3 portfolio's forward dividends of $64.71 brings my total taxable account forward dividends to $5,702.49.  My Roth IRA forward dividends also increased to $271.71. 

This article was written by Passive Income Pursuit. If you enjoyed this article, please consider subscribing to my feed.

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