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Wed. Dec. 9, 2009

3 Styles Of Sucessful Dividend Investing *

There are certainly many ways to categorize the different styles of investing in dividend stocks, including yield, risk, growth, etc. An investment strategy based on any of these could be successful, if implemented within the framework well-crafted plan. Over the years, I have found that most dividend investing styles fall into one of the three major categories listed below:

High Yield/Low Growth

I would classify dividend stocks with a yield over 5% and dividend growth less than 2% in this group. This is probably the most popular group, particularly among those new to income investing. It is human nature to want it now and lots of it, and high yield stocks appear to deliver that desire. However, there is often a reason the stock’s yield is so high and many times the investor learns the hard way the yield is not always sustainable. Examples of stocks in the high yield/low growth group include:

  • National Retail Properties, Inc. (NNN) – Yield: 7.12 – Dividend Growth: 1.4%
  • Integrys Energy Group, Inc. (TEG) – Yield: 6.63 – Dividend Growth: 1.5%
  • Realty Income Corporation (O) – Yield: 6.61 – Dividend Growth: 2.1%
  • CenturyTel Inc. (CTL) – Yield: 5.97 – Dividend Growth: 0.0%

Low Yield/High Growth

I would classify dividend stocks with a yield less than 2.5% and dividend growth greater than 7.5% in this group. Low yield and high growth dividend stocks are the other extreme of high yield and low growth stocks. Their long-term risk is associated with growing the yield-on-cost over time. If the dividend growth rate is cut, the investor’s future earnings and yield will also be cut. Stocks in this group would include:

  • Aflac Incorporated (AFL) – Yield: 2.44 – Dividend Growth: 16.7% [Analysis]
  • United Technologies Corp. (UTX) – Yield: 2.25 – Dividend Growth: 15.0% [Analysis]
  • Eaton Vance Corp. (EV) – Yield: 2.05 – Dividend Growth: 15.0%
  • Colgate-Palmolive Company (CL) – Yield: 2.02 – Dividend Growth: 10.3%
  • Wal-Mart Stores, Inc. (WMT) – Yield: 2.01 – Dividend Growth: 11.3% [Analysis]
  • Canadian National Railway Company (CNI) – Yield: 1.63 – Dividend Growth: 15.0%
  • Lowe’s Companies, Inc. (LOW) – Yield: 1.53 – Dividend Growth: 15.0% [Analysis]

Moderate Yield/Moderate Growth

I would classify dividend stocks with a yield between 2.5% to 5% and a dividend growth rate between 2% to 7.5% in this group. This is a good compromise between the above too extremes. It is an approach focusing on a moderate yield and dividend growth rate. Keeping these two metrics at a reasonable level will help reduce the likelihood of either being cut. Companies in this group are your traditional dividend growth stocks, as seen from the list below:

  • Chubb Corp. (CB) – Yield: 2.88 – Dividend Growth: 6.1% [Analysis]
  • The Procter & Gamble Company (PG) – Yield: 2.81 – Dividend Growth: 7.3% [Analysis]
  • Johnson & Johnson (JNJ) – Yield: 3.00 – Dividend Growth: 7.5% [Analysis]
  • Automatic Data Processing Inc. (ADP) – Yield: 3.09 – Dividend Growth: 5.5% [Analysis]
  • Emerson Electric Co. (EMR) – Yield: 3.13 – Dividend Growth: 6.4% [Analysis]
  • Chevron Corporation (CVX) – Yield: 3.41 – Dividend Growth: 5.1%
  • SYSCO Corporation (SYY) – Yield: 3.39 – Dividend Growth: 4.3% [Analysis]

In my personal investing strategy, I incorporate measured participation in each of the above groups. My primary focus is on the Moderate Yield/Moderate Growth stocks, believing that over time this group carriers the highest probability of success. The remaining two groups offer the potential for above average returns – as long as they continue to perform at the estimated level, which is often difficult to do over time.

Full Disclosure: Long NNN, TEG, O, CTL, AFL, UTX, WMT, CNI, CB, PG, JNJ, ADP, EMR, CVX, SYY. See a list of all my income holdings here.

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8 Responses to “3 Styles Of Sucessful Dividend Investing *”

  1. Bill66 says:

    The other day you wrote that you don’t consider foreign stocks because of currency fluctuations. But a fair number of domestic companies on your radar — AFL, WMT, PG, etc. — have significant foreign earnings subject to those same currency fluctuations.

    To me, foreign exposure seems like an important and useful element for U.S. investors, both in U.S.-based global companies as well as foreign-domiciled companies. Currency fluctuations will always be there, but over time I’m not sure they hurt an investor that much.

    Best wishes.

  2. TMT says:

    Isn’t it amazing how much higher the yields on the stocks you identified were just a few short month ago?

  3. a. palmer jr. says:

    I’m just trying to find a few stocks that pay dividends to offset the lack of interest paid on savings accounts nowadays.

  4. TMT: Indeed. It is really time for a correction.

    Best Wishes,
    D4L

  5. Bill66: My comment was in relation to fluctuations in dividends. Domestic companies, such as the ones you mentioned, with significant foreign exposure do not vary their dividends as a result of currency exchange.

    Foreign exposure is an important part of my overall portfolio. I current have it with a 24% target allocation. However, I have chosen to meet this allocation in non-income based investments.

    Best Wishes,
    D4L

  6. a. palmer jr.: Be sure to understand the risks in stocks compared to savings accounts before investing. Unlike FDIC insured investments, you can lose money in stock investments.

    Best Wishes,
    D4L

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