Dividend growth companies have the products or services that customers want, are available at good prices, have unique competitive positions, earn significant profits every year and drown their shareholders in cash. Clearly, dividend growth companies are attractive investments, whether you are an acquirer or an ordinary mom and pop investor, provided valuation is not excessive.
Thus, dividend growth stocks make for great acquisitions.
Furthermore, portfolios of dividend growth stocks selected in 2014 will likely look very different come 2044. The difference will not be a result of dividend growth companies failing, but of mergers and acquisitions of those attractive companies. Only a small portion of companies just outright fail, but when dividend growth companies are the prettiest girls in school, many will want to take them to the prom.
When I look at the dividend aristocrats list from 25 years ago, I notice that many of those companies no longer exist, which reiterates my point about dividend growth companies being attractive targets for mergers and acquisitions.
As a passive investor, I seldom sell. However, if the company acquiring my dividend holdings pays me cash for my stock, I will have to sell.
Such an event occurred in 2008 when InBev purchased Anheuser-Busch (BUD) for $70 per share and when DuPont (DD) acquired Rohm & Haas in 2009. Additionally, now that Dollar Tree (DLTR) is buying Family Dollar Stores (FDO), only a small portion of the acquisition will be paid in stock and will subsequently trigger a taxable event for shareholders like me. Since I expected more in taxable income in 2015, and the taxable event will potentially put me in a higher tax bracket, selling my FDO stock today makes sense to avoid tax waste.
In the event of any tax-deferred acquisitions, I would simply hold onto the shares I receive and reinvest the cash I receive in other quality companies selling at attractive valuations to save on commission.
In essence, I am holding in my retirement account, and then when the cash is paid, I can use it to buy other shares. At the same time, I will probably keep the Dollar Tree shares, despite the fact that they will not pay a dividend.
Of course, the issue with selling FDO is that I missed out on the bidding war with Dollar General. The problem is that Dollar General’s offer, while a few dollars per share higher, was all in cash. Whoever acquires Family Dollar will reward their shareholders tremendously, because they are paying for a great asset with cash that costs very little today.
If you add in synergies expected, that deal will result in great returns for Dollar Tree or Dollar General shareholders, depending on who ends up owning Family Dollar stores.
Full Disclosure: Long FDO