When looking at shares, dividends are important for a lot of investors. While some are happy simply to invest in a growth story, many shareholders want to know that they will regularly receive a dividend. Any dividend is welcome to me, but I particularly like what I call dividend raisers – companies that increase their payouts to shareholders.
However, just seeing a headline about a share raising its dividends doesn’t make it attractive to me without more information. It is helpful to understand the context of any dividend raise. Has the company made more money, which enables it to raise the dividend securely? Is the dividend likely to remain stable or increase again in future, or could a raise today be setting it up for a cut later?
Below are a couple of dividend raisers I am avoiding for now.
A small raise doesn’t make up for a big cut
Looking at oil giant Shell recently, the dividend headlines have been upbeat. Its third-quarter profits beat expectations. Not only that but the energy major increased its quarterly dividend by 4%, not bad at a time when the oil sector has faced the worst headwinds in decades. The company’s chief executive also said, “We are starting a new era of dividend growth”. That could sound like music to the ears of dividend seeking investors. The company is a reputable name, with a huge business and a commitment to dividend growth.
Yet I would still avoid Shell. In fact, I sold down my whole stake this year. The latest dividend increase is welcome and returns Shell to the list of dividend raisers. But it comes on top of a massive dividend cut of two-thirds earlier this year. The company hadn’t cut its dividend since the Second World War and management had made positive noises about maintaining the dividend despite difficult trading conditions. So to hit shareholders with such a large cut just a couple of months later felt disingenuous. While I like the company and believe it can sustain a healthy dividend, I don’t like what the previous move suggested about management’s approach to shareholders. It didn’t strike me as shareholder friendly, which I always regard as a red flag for an investment.
Dividend raisers need improved business to keep raising
Another company I like but do not to invest in right now is the supermarket group Morrison’s. I think the supermarket is a well run company and it has a strong offering. It has increased its dividend in the past several years. Last year it even rewarded shareholders with a special dividend payment of 4p.
But I don’t like the competitive environment in which the company operates. Supermarket retailing in the UK is brutally competitive. The rise of Aldi and Lidl makes it harder every year for a company like Morrison’s. Add to that increased online competition and the end of a business rates holiday next year and I think the business pressures will continue to pile up.
I like to know what to expect and find strong opportunities for the long term. While the company is one of the stock market’s dividend raisers at the moment, its long-term prospects are less clear. That is why I will avoid Morrison’s for now.
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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.