Every month the PTI Newsletter will highlight and discuss the performance of a “Classic DGI Stock” to demonstrate what types of stocks we are looking for, and what kind of total return and dividend income we can hope to achieve.  This month that stock is Air products.Every month the PTI Newsletter will highlight and discuss the performance of a “Classic DGI Stock” to demonstrate what types of stocks we are looking for, and what kind of total return and dividend income we can hope to achieve.  This month that stock is Air products.

Air Products & Chemicals, Inc. engages in the manufacture and distribution of atmospheric gases. It provides industrial gases for numerous industries, including the refining, chemical, electronics, and food and beverages. They have been a world leader for more than 75 years. Headquartered in Allentown, PA, they operate in 50 countries with sales reaching $8.9 billion.

Talk about a boring company, Air Products makes and sells industrial gases.   That’s it.  Nothing fancy.  Nothing interesting (unless you’re into industrial gases!).  Not an exciting growth stock like Facebook (FB), Netflix (NFLX) or Tesla (TSLA).  It’s just a well-run company that makes a product essential to modern life.  A company most people have never heard of.

But it has increased its dividend for the past 37 years in a row.  And this makes it is a Dividend Champion, a Dividend Aristocrat, and a classic dividend growth stock.  Its performance over the past 10+ years proves this.

I first bought APD in 2009 for about $82 per share.  I bought it because it met my buying criteria, which are:

  • A Dividend Champion, Challenger or Contender
  • Dividend yield > 2.0%• Payout Ratio < 60%
  • Chowder Number (yield + 5 yr dividend growth) > 12.0%
  • Smooth uptrend in earnings on FAST Graph
  • Undervalued on the FAST Graph
  • An investment grade debt rating from S&P

Here is what the FAST Graph looked like at that time.  I will leave the details of how to read a FAST Graph for another time, but basically if the black price line is near the orange earnings line then the stock is trading at a fair value.  You can also see that the orange line (the earnings line) has a smooth uptrend, which is another characteristic I look for.  I purchased it at some point between 9/09 and 9/10. (see image above)

Please note that none of the buying criteria I use are forward looking. They all describe what the stock has done in the past, or its present conditions. I don’t use any projections or expected future performance to make my stock selections, because in the end, nobody knows what will happen in the future.

In the first few years after I bought it, APD’s price basically went nowhere. In the FAST Graph below the circles again show where I bought it, and where the price was after about 3 years. There was very little change.

Fast Graph of Air products from 2000 through 2012, showing the earnings increase, the dividends, the fair price, the purchase price, and the price in 2012.

But that’s just the price. And at DGI we don’t worry about the price. What about the dividend? Well, that’s a different story. In 2009 APD paid a total of $1.65 per share in dividends. In 2010 it paid $1.77, in 2011 it paid $2.06 and in 2012 it paid $2.31. That means that while I held the stock, and the price was going nowhere, the dividend increased 40%! So even though it seemed like I wasn’t getting anything out of my position in APD, in fact, my dividend income was increasing significantly, from $76.11 in 2010 to $99.33 in 2012. Had I been owning the stock looking price appreciation I might have sold APD as it moved up and down over those three years, because I wasn’t getting any capital appreciation. But I wasn’t looking at the price. I was looking at the dividend. And my dividend income kept increasing, year after year. So, of course, I held on to it.

Now let’s fast forward to the today. In 2013 APDs stock price finally started to rise, this time for good. And now the price is over $215. And each year the dividend has continued to increase so that this year the dividend is $4.64 per year, 280% higher than it was when I first bought it. In those early years, while the price was moving up and down, rather than considering selling it I was actually buying more! The dividends I was receiving were being reinvested back into the position, buying more of the stock. So, whereas I started with 43 shares, I now own 119. Instead of collecting $76 per year in dividends I’m now collecting $552. My total return, from the increase in the stock price and the dividend income, is 14.0% annually. Far more than the 10.1% that the market has returned during that same time period.

Fast Graph of Air products from 2000 to today, showing earnings increase, dividends, fair price, today's price, data for shares bought, annual return, dividends produced, and final position values

Dividend Growth Investing (DGI) is all about buying quality dividend growth stocks and holding them for the long-term while the magic of dividend growth and reinvestment creates a compounding machine which supersizes your returns. It’s all based on the dividend characteristics of the stock. My success with my APD position would not have happened if my focus was on the price, and not on the dividend, and if I did not have the patience to allow the dividend growth and reinvesting to work its magic. Had I not been a DGI investor, I probably would gotten fed up with the roller coaster ride and abandoned the stock a back in 2010-2012. But I knew that this classic DGI stock would most likely continue to increase its dividend, and as it did so, year after year, eventually t he stock price would follow. Which is exactly what happened, as demonstrated by the graph below.

Air products graph of Price vs Dividend from 2008-2019 showing how the price tracks the dividend

This shows graphically what I describe in the earlier. The price was basically flat from 2009 through 2013, hovering around 70-80. But while the price was stagnant the dividend kept increasing. And eventually the price began to follow the dividend.

One last piece of data. Going back a little further, to the year 2000, a $10,000 investment in APD would today be worth $82,043, would have produced $14,754 in dividends, and given you an annual return of 12.0%. Conversely, a $10,000 investment in the market (as represented by the ETF SPY), over the same period, would only be worth $23,218, would have produced only $4,037 in dividends and annual return of 4.3%.

Air Products is a classic DGI stock. It runs its business in such a way that it is able to raise its dividend every year, year after year, for the past 39 years. This has been through all sorts of market environments. Recessions. Dot-com bubbles. Financial meltdowns. Through it all, APD kept raising its dividend. This is the kind of company we at PTI want to invest in. Classic DGI stocks which have proven their capability to provide us with increasing dividend income year after year.

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