Building a portfolio with a growing dividend income stream may not be everyone’s goal, but if it is your goal, then much like building a house, your dividend investment portfolio has to have a strong foundation. In my opinion that strong foundation is analogous to a long history of sustainable increasing dividends. At the very lowest level, it instills a responsibility in current management that they have an upcoming bill that they have to pay to the people that employs them (i.e. the owners of the company).
Last week, many yield chasing investors were reminded about having a proper foundation when copper producer, Freeport-McMoRan (FCX) absolutely destroyed their shareholder’s income stream,
slashing its dividend 84% – erasing a lucrative income stream for investors and serving up a big reminder these payments aren’t guaranteed.
The company, which explores for materials like copper and gold, announced it is cutting its quarterly dividend down from 31.25 cents a share down to just 5 cents. That’s a massive cut in an implied annual dividend of $1.25 a share to $0.20 a share.
Freeport’s cut is staggering. The reduction takes away $1.05 a share from investors – which is no small sum considering the company has 1.04 billion shares outstanding. All told that amounts to $1.1 billion in lost dividends. The executives will feel the loss, too. CEO Richard Adkerson will miss out on $1.6 million a year in lost dividends.
What makes this cut sting even more is that dividend reductions are extremely rare in the materials sector. There have only been 17 dividend cuts by companies in the S&P 500 materials sector in the past 10 years, including Freeport, says S&P Dow Jones Indices.
Building a Strong Dividend Growth Investment Foundation
First thing is first, as with all things having to do with the markets, there are no guarantees. With that being said, I believe a good way to build a strong foundation is to rely on a company that has increased their dividends through multiple recessions and the disaster that was the 2008 market. To find these companies there are two great resources:
- The Dividend Aristocrat List – Maintained by S&P
- The Dividend Champion List – Maintained by David Fish
While there are a few differences between the two dividend lists the main thing to remember is that they both provide equities who have increased their dividends at least 25 years (and some into the 50s+)! Since 1990 there were 3 recessions, the dot com burst and the disaster that was 2008 – 2009 yet all the companies on both of these lists increased the amount they pay out to their shareholders year after year.
What other metrics would you suggest?