If you think dividend stocks are about to soar, wait until you see what happens with the select subset that is actually accelerating its payouts.
[ad#Google Adsense 336×280-IA]Low rates for longer means net present value calculations look great for stocks that pay meaningful yields.
And those that are boosting their dividends at an increasing rate are basically breaking Wall Street’s spreadsheets.
Take CoreSite (COR), a developer and landlord for data centers that we first discussed in [February].
The company had recently increased its payout by 26%, an acceleration over last year’s “mere” 20% boost:
Investors who bought CoreSite the day it declared the latest increase are sitting on 54.9% gains in just over seven months. You can see the stock price took off as its current yield was steadily bid down by new investors:
“Panic Buying” After CoreSite’s Accelerated Hike
Sleepy Duke Energy (DUK) also benefited from turning up the volume in its dividend increases. It doubled its token 2% annual increases to 4% in 2015. That may not sound like much, but investors celebrated the news by bidding up DUK’s shares 19.4% in the year since:
Utility Investors Dig Faster Payout Growth
Fellow utility Edison International (EIX) turned on its dividend juice in December 2014. The company has doubled its payout since 2005, with 35% of the increase happening in the last two years alone:
This drove a 27% total return for EIX investors in the 19 months since the company announced its payout jump.
More recently, Leggett & Platt (LEG) declared a $0.02 dividend increase (versus its usual annual $0.01 boost) and did so a quarter earlier than normal. Shares rocketed up 8.3% in less than two months:
Two Pennies Instead of One Sends LEG Soaring
And storage landlord Extra Space Storage (EXR) may be the next to climb, with management announcing a 32% dividend increase (versus 25% a year earlier). Shares are up 2.4% since the May announcement.
Why Dividend Acceleration “Works” as a Strategy
From a fundamental standpoint, a dividend increase that exceeds previous precedent is management signaling to investors that it’s making more money than it knows what to do with. The business has hit a tipping point of sorts, where the machine no longer requires as much reinvestment to continue growing. Please, take a bigger raise, shareholders.
Meanwhile investors and money managers lose their minds because, in theory, there is no valuation too high for a company that is increasing its dividend at an accelerating rate. Their spreadsheets literally break, and they buy the stock in a frenzy.
Interestingly these stocks are not bid to the sky immediately. In fact, this dividend acceleration buying strategy does not require any foresight or forecasting whatsoever.
If you’d simply bought these stocks the day they announced their higher dividends, you’d have enjoyed the gains of 55%, 19%, 27%, 8% and 2% respectively that I outlined. Best of all, these profits were booked relatively quickly, without much volatility, and with dividend income to boot.
— Brett Owens
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Source: Contrarian Outlook