Earning a stream of regularly growing dividends from shares can be a good source of extra income. No dividend is ever guaranteed, but some shares have an excellent track record of raising their dividends. So-called Dividend Aristocrats are large companies that have raised their shareholder payout annually for a quarter of a century. Quite a few UK shares in diverse sectors meet that definition, from Diageo and DCC (LSE: DCC) to Cranswick and Scottish Mortgage.
In the past several months I’ve bought one of those UK Dividend Aristocrats. I’ve also purchased a US dividend powerhouse for my portfolio. Here is why.
Cash flow machine
The US Dividend Aristocrat I invested in is Altria (NYSE: MO), the manufacturer behind iconic tobacco brands including Marlboro.
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As an industry, tobacco has attractive economic characteristics. Products are cheap to make but can be sold at a high price. Owning premium brands like Marlboro gives a manufacturer pricing power. That throws off huge cash flows. As a mature industry, there is limited room for growth (in fact, tobacco sales volumes are in global decline), so reinvestment costs for the business are lower than fast-growing firms with high capital expenditure requirements.
So a company like Altria (or UK rival British American Tobacco, which is also a serial dividend raiser) can fund a hefty dividend. Altria has raised its payout annually for more than half a century.
Dividend sustainability
But what happened in the past does not necessarily give an indication of what will come in future.
As tobacco volumes continue to decline, sales could fall at Altria. Its pricing power can help the manufacturer mitigate falling sales volumes by boosting prices. But it can only do that so much before losing customers.
In the long term, I see a risk to the Altria dividend. But I think the company may have many good years or decades of profit left in it yet. With an 8.0% dividend yield, it is a juicy income provider for my portfolio.
Avoiding overpaying
There are a few UK Dividend Aristocrats I have been eyeing for a while without buying, because I felt the shares were too expensive. If Diageo shares were cheaper, for example, I would happily add them to my portfolio. But for now, I am not buying them.
Over the past year, the DCC share price has tumbled 28%. That offered me a buying opportunity and I have seized it to add the diversified conglomerate to my portfolio.
Growth focus
The shares currently yield 4.0%. I am hopeful that dividends can grow in future if the business continues to generate enough spare money from its range of operations. Those include a large gas distribution business. That highlights some of the risks with DCC shares: surging gas prices have helped sales, but when they fall back in future that could eat into revenues and profits.
DCC has proven it knows how to build a business, though. I think it remains well positioned for growth thanks to a broad spread of activities and proven management.
The dividend last year rose by 10% for the second year in a row. DCC’s record of annual dividend increases stretches back 28 years. I see further opportunities for the company to grow organically and by acquisition. That could be good news for future dividends.
