Taste of the Friday File: Dividend Growth

An excerpt from the December 18 Friday File (with a small update)

By Travis Johnson, Stock Gumshoe, January 18, 2021

Stock Gumshoe is closed in honor of Dr. Martin Luther King, Jr. today, as the markets are also closed, but for those looking for a little reading… I’m sharing here a taste of the Friday File from a month ago.

What follows was the final section of the Friday File I published on December 18 (if you’re a paying member, you can see the original and the rest of that commentary here), at which time I was thinking about making some gradual shifts to reduce risk in my Real Money Portfolio. For those who don’t know, that portfolio is the lion’s share of my family’s investment portfolio, currently including about 50 different stocks as well as some mutual funds and some more speculative (and very small) options bets, and writing about what I buy and sell and how I position the portfolio is often the focus of my Friday File commentaries (I update the full portfolio most weeks, with updates on buys and sells, performance and allocations). I am hesitant to ever tell anyone else what to do with their money, and empty opinions about stocks are always of limited value, but I hope it is helpful to tell you what I’m doing with real money, and why.

I don’t see a reason for the market to crash in any given moment, and you shouldn’t believe my claims of prescience if I did, but with the market at almost unprecedented valuations I’m certainly finding a little bit more solace in cash flows and dividends than I am in speculative growth ideas. The companies I discussed when I was delving into these high-profile and high-growth dividend payers are today at roughly similar prices to where they were then. Indeed, despite the insanity of the past month, the S&P 500 is also essentially unchanged.

12/18/20: Innovative Industrial Properties (IIPR) increased its dividend again, by 6% to $1.24 for this next payout (in January, record date 12/31)… or, if you want to be a bit more fair and look at annual increases, by 24% over the fourth quarter dividend for 2019. That continues a remarkable string of dividend increases, even if it’s a bit less dramatic than the 100%+ annual increases we saw in IIPR’s first couple years… and it also means this is the third quarter in a row to have a sequential increase (meaning, the dividend was raised from the prior quarter, not just from the prior year). Companies that can raise their dividend every quarter, or almost ever quarter, let you compound your holdings even more quickly… and they tend to attract lots of loving shareholders.

“Buy rising dividends and reinvest to compound your holdings” is probably the single most effective long-term investment strategy out there over the past few decades… it’s not as sexy as buying hot growth stocks, and not always as effective at maximizing returns during good markets, but it can build wealth over time, and in pretty dramatic fashion if you’re patient. If you add on a strong growth market and a hot investor story, like IIPR or like American Tower (AMT) in cell towers (also an “every quarter” dividend raiser, though theirs doesn’t grow quite as fast and the dividend yield has usually been paltry), and you might really catch a tiger by the tail.

I haven’t added to my IIPR stake in quite some time, and in fact sold part of it during the initial pandemic collapse when it hit my stop loss (that was an error, in retrospect, but I was worried about their weaker tenants staying open during the shutdowns… and it wouldn’t have taken many defaults to really clobber IIPR’s share price), but the compounding has worked awfully nicely and my average cost is firmly negative so I’m not terribly itchy about taking profits here, even with a new all-time high share price and a valuation that is growing increasingly challenging.

The dividend yield for IIPR is just below 3% now, so it’s not entirely ridiculous, and the dividend is covered nicely by their FFO and cash flow, so the train could well keep rolling along… their deal growth is still hitting the income statement in pretty dramatic fashion, as deals signed early in 2020 will just begin paying rent now in many cases, so they keep posting near-100% revenue growth… and being a richly-valued REIT means that you can keep the game going, because then you can sell more shares at elevated prices, use that to buy more properties, and, since the deals they’re signing still have ve