255 years of dividends

Procter & Gamble, Emerson Electric, Coca-Cola, Colgate-Palmolive, Johnson & Johnson. Five companies which alone total 255 consecutive years of increasing their dividends. Like an impregnable citadel, they watch wars, famines, natural disasters and revolutions pass under their noses, without worrying too much. This impressive history gives an image of the endurance capacities of these five companies, which manage to generate cash over the long term, regardless of economic hazards.

The number of consecutive years of dividend increases is a powerful indicator for someone with an income-based investment strategy. What's more, unless you're already firmly planted in retirement, it's best to rely on average but progressive returns than on large and stable (or worse, inconsistent) distributions. The advantage is twofold: not only do we insure ourselves against inflation risks, but we also benefit from the magic of compound interest which allows us to catch up with and surpass after just a few years the returns of so-called more generous companies.

Let's take two fictitious companies, Gaz-Superdividende SA (GSD) and Pharma-Dividendecroissant SA (PDC). GSD currently offers a dividend of $6 for a stock price of $100. PDC, which is trading at the same price, offers a dividend of only $3, a yield half as high. GSD never increases its distributions because it already uses almost all of its earnings to pay the dividend and because the company has a sluggish growth rate. On the contrary, PDC increases its distributions at a sustained rate of 15% per year. It can afford to do so because its earnings more than cover the dividend payments and, moreover, it has a very attractive growth rate. After only five years, the PDC dividend will have caught up with that of GSD, after ten years, it will have doubled it, after 13 years, it will have tripled it, after 15 years, it will have quadrupled it... We can see that, The magic of compound interest is discreet during the first few years, but the longer you keep the title, the more it works!

It is said that when you invest in stocks, it is for a period of at least five years. This value is already very low, especially when you look at the 'lost decade' of 2000-2010. A minimum of ten years seems much less risky. Over such a time horizon, it is therefore better to give up generous distributions in favor of increasing dividends. But it is also necessary to ensure that the company is sufficiently strong to continue to pay and grow its distributions in the future. In addition to the distribution ratio, the number of consecutive years of dividend increases gives a good picture of this capacity, especially when we are in the presence of five aforementioned mammoths.