Consistency is key for income investors. Generally, they want to invest in stable companies with business models that produce solid (and increasing) dividends, regardless of the market cycle. The best of them all are called Dividend Aristocrats because they are elite in their consistency, generating dividends that have gone up annually for 25 or more straight years. There are only a few dozen of these Dividend Aristocrats currently on the market.
But there are many more companies that are on their way to that plateau, including CME Group (NASDAQ:CME). It is not only a good dividend stock, but it also has the potential to generate long-term returns.
CME: A decade of rising dividends
CME Group runs the leading derivatives exchange in the world. It started as the Chicago Mercantile Exchange, but then merged with the Chicago Board of Trade in 2006. Then in 2008, it acquired the New York Mercantile Exchange, which owned the Commodities Exchange. Now all four are under the CME Group umbrella.
In 2012, CME changed the way it distributes dividends, establishing an annual variable dividend at the end of the year in addition to the quarterly dividend. The annual variable dividend would increase or decrease based on the amount of excess cash available at the end of each year. The first full year of implementation was 2013, when it offered a $0.45 quarterly dividend with a $2.60 annual special dividend.
Since then, the quarterly dividend has increased each year. In 2021, the company bumped it up to $0.90 per share, double what it was in 2013. The special annual dividend has ranged from $1.75 per share to $3.50 per share. In 2020, the special dividend was $2.50, the same as the previous year.
Two years before that shift in 2012, CME raised its dividend, making it 11 straight years with a dividend increase, dating back to 2011.
At Wednesday’s prices, CME pays out its regular quarterly dividend at a yield of about 1.7%, which is slightly better than the average yield of the S&P 500. It has been in that range for the past few years. The payout ratio, which is the percentage of earnings that go toward the dividend, is around 53%. That is slightly on the high side, reflecting the fact that the company went through a difficult year. But it is still in a pretty good range and should tick down as earnings are expected to improve.
Why CMEʻs dividend should grow
There are a few reasons why investors should feel confident that CMEʻs dividend will continue to rise. First, CME Group is the largest derivatives exchange in the world in a pretty small pool of competitors, so it is a stable company with a decent moat that is not going anywhere.
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