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Wed. May. 5, 2010

20 Dividend Stocks With A 20% Yield In 20 Years *

There are income investors and Dividend Growth investors. While the distinction is rather simple, it slips past many casual observers. Income investors are investing for maximum current income, while dividend growth investors are looking to maximize income over an extended period of time — usually sacrificing current income for potential greater future earnings.

Often when I write about a stock that is yielding 2%, 3% or even 4%, I get a question that goes something like, “Why would you buy that stock when there are better options like ‘Amalgamated Risk?’ Its currently yielding 7%, 8%, 9% or more?” With this statement the reader has possibly identified themselves as an income investor, and but definitely established the fact that they are not a dividend growth investor.

Tracking Yield On Cost

Yield-on-cost (YOC) is simply Current Annual Dividend dividend by Original Cost Per Share. YOC not a substitute for calculating an internal rate of return (IRR). The IRR calculation takes into account both capital appreciation and the timing of cash flows (purchases, sells and dividends). However, as a dividend growth investor, my primary focus is on dividend growth and since my desired holding period is forever, capital appreciation is little more than an interesting side note. YOC is much better suited for tracking dividend growth since it is individually tied to a stock and takes into account all the variations of growth rates over time, along with the timing of purchases. Also, it is useful when trying to explain to our income investor brethren why we chose the stock yielding 3% over ‘Amalgamated Risk’ at 8%.

Recently, I modified my D4L-Data model to include projections of YOC after 5, 10, 15 and 20 years. These projections are derived by growing the current yield using the dividend growth rate. As for the dividend growth rate, I use the minimum of the 1, 3, 5, 7 or 10 year compound annual growth rates; or 15% if in every consecutive 4-year period dividends grew on average in excess of 15%.

20 Dividend Stocks With A 20% Yield In 20 Years

Sorting the stocks in my D4L-Data model by their 20 Year YOC and throwing out some bad apples, we are left with these 20 stocks that are projected to have a 20% YOC in 20 years:

Lowe’s Companies (LOW) | Analysis
- Current Yield: 1.29%
- Dividend Growth: 15.0%
- 20 Year YOC: 21.12%

McGrath RentCorp (MGRC) | Analysis
- Current Yield: 3.32%
- Dividend Growth: 10.26%
- 20 Year YOC: 23.40%

Fastenal Company (FAST)
- Current Yield: 1.46%
- Dividend Growth: 15.00%
- 20 Year YOC: 23.94%

Colgate-Palmolive (CL) | Analysis
- Current Yield: 2.41%
- Dividend Growth: 12.48%
- 20 Year YOC: 25.34%

C.H. Robinson (CHRW)
- Current Yield: 1.61%
- Dividend Growth: 15.00%
- 20 Year YOC: 26.32%

Canadian National (CNI)
- Current Yield: 1.75%
- Dividend Growth: 15.00%
- 20 Year YOC: 28.69%

Walgreen Company (WAG) | Analysis
– Current Yield: 1.57%
- Dividend Growth: 15.72%
- 20 Year YOC: 29.14%

Raven Industries (RAVN) | Analysis
- Current Yield: 1.81%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.65%

Eaton Vance (EV)
- Current Yield: 1.82%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.72%

HCC Insurance (HCC)
- Current Yield: 1.91%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.30%

Becton, Dickinson (BDX) | Analysis
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

IBM (IBM)
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

United Technologies Corp. (UTX) | Analysis
- Current Yield: 2.05%
- Dividend Growth: 15.00%
- 20 Year YOC: 33.63%

Praxair, Inc. (PX)
- Current Yield: 2.15%
- Dividend Growth: 15.00%
- 20 Year YOC: 35.17%

Owens & Minor (OMI)
- Current Yield: 2.25%
- Dividend Growth: 15.12%
- 20 Year YOC: 37.55%

Linear Technology (LLTC)
- Current Yield: 2.93%
- Dividend Growth: 15.00%
- 20 Year YOC: 47.94%

McDonald’s Corp. (MCD) | Analysis
- Current Yield: 3.12%
- Dividend Growth: 15.00%
- 20 Year YOC: 51.01%

Nucor Corporation (NUE) | Analysis
- Current Yield: 3.18%
- Dividend Growth: 15.00%
- 20 Year YOC: 52.00%

Cardinal Health, Inc. (CAH) | Analysis
- Current Yield: 2.02%
- Dividend Growth: 17.65%
- 20 Year YOC: 52.06%

Meridian Bioscien (VIVO) | Analysis
- Current Yield: 3.40%
- Dividend Growth: 15.00%
- 20 Year YOC: 55.67%

One key component of current yield is risk. If Treasuries (risk free) were paying 7%, 8% or 9%, many income investors and a significant number of dividend growth investors would divert a portion of their portfolios to them.

You will note that all the above stocks are yielding well under 4%. It is also important to note that I do not believe that all the above stocks will achieve their 20 year YOC. In much the same way high-yielding stocks often end up cutting their dividends, many of the above stocks will end up cutting their dividend growth rate. Put another way, there is risk associated low-yield high-dividend-growth stocks. However, for the high dividend growth stocks that perform well over the next 20 years, the rewards are potentially much higher than those of a high-yield, low growth stock.

Full Disclosure: Long CNI, UTX, MCD, NUE. See a list of all my income holdings here.

(Photo Credit)


12 Responses to “20 Dividend Stocks With A 20% Yield In 20 Years *”

  1. dizzy7 says:

    I’m glad you made a point of stressing that these rates of increase are not likely to be sustained. It’s all too easy to look at a history of 15 or 20% dividend increases and assume they will continue indefinitely when, in fact, very few companies can increase earnings at that rate for an extended period. Sooner or later the payout ratio hits whatever they have set as their maximum and future dividend increases will drop to the rate of earnings increases. Even so, I certainly agree with you that investing in them is an excellent long term strategy.

  2. dafuzz says:

    I follow your articles via My Yahoo Homepage. I’m retired and have all of my savings in an IRA. I’m at the age that I must take MRD each year so I must have enough cash to transfer to a regular saving account plus pay the necessary taxes associated with the MRD.
    What I’m requesting is (or suggesting) that an article by you showing the advantages of your investing formula vs investing in high yield (5%-9%) stocks would help clarify any questions or misconceptions that I have.
    As of right now my dividends will cover my MRD until I’m 85. After that I’ll have to start dipping into the principle to cover the MRD.

  3. toeser says:

    This was an objective, well-written article. But many “experts” criticize people who seek current high yield as “uninformed” or worse, citing the growth-of-dividends philosophy. But each investment style must be measured against each individual’s investment needs. I am retired, and statistically, will be dead in 20 years. Therefore, show me the money now, baby.

  4. Aging gracefully says:

    am retired & look for double digit dividends because i apply the rule of 72. it tells me how long my investment in a security will double, eg, 72 divided by 20% yield doubles in 3.6 years, 12% in 6 years, 10% in 7.2 years. as long as the company pays its dividend it stays in my portfolio. if it suspends dividend its sold. if reduced is a judgment call depending on several factors. stock appreciation is a bonus that all my high yield stocks have enjoyed-over 60 stocks at about $100 each. dividend increases in percentage terms are big gains but are computed on such small numbers that it takes 20 years to produce a 20% yield. some of my stocks yield 20% quarterly now. applying the rule of 72 will drastically reduce the wait. stock growth creates paper profit that increases personal wealth but cannot be spent until a stock is sold. i have several dividend growth stocks, JNJ,PFE,NVS,TM, but all are reinvested & getting happy compounding waiting for the day i turn them into monthly paychecks. like toeser says, ‘show me the money now, baby.’

  5. dizzy7 says:

    @toeser,

    This must be old goats week at Dividends Value as all 3 of us who’ve posted so far are retired. Like you, I tend towards stocks with relatively high current dividends, tho I do mix in some with moderate yield/moderate growth like MCD and UTX. However, a stock yielding 1% or so now doesn’t hold any interest for me even tho it may have a YOC much higher than that in 20+ years.

    If you haven’t already read it, I recommend the author’s earlier post “3 Styles of Successful Dividend Investing” (shown in the “Related Posts” section above) which does an excellent job of laying out various dividend growth strategies.

  6. Bill66 says:

    I’m in the boat with those who don’t want to buy 1-2 percent dividends.

    But be patient a bit. Those stocks might soon be sporting higher dividends. As in when the market declines.

    And your favorite dividend stocks will also be showing higher dividend yields, for the same reason — price declines.

    Right now, keep your powder dry and pick out a few stocks you might buy when they become cheaper.

  7. pjgz says:

    Hi Dividends4life,

    I noticed that you mentioned VIVO in your recent dividend stock analyais, but do not own any shares.
    Do you think it is too risky? If I read your analysis correctly, VIVO is significantly undervalued by the market. Since I also calculate VIVO to be more undervalued than most stocks, I would have thought that you’d be piling in.

    I think VIVO got too pricey 2-3 years ago, but it is looking attractive again. Thoughts?

  8. D4L says:

    pjgz: VIVO is one I am watching closely. Its FCF Payout is a little high. I want to get a feel in it is increasing or decreasing.

    Best Wishes,
    D4L

  9. Lowell Herr says:

    Again, I differ with the point of view that yield can ever be calculated based on the original cost of the stock.

    If this makes investors feel better, then I assume it is OK to use, but know this sort of calculation is an incorrect use of the term yield.

  10. Larry says:

    Hey UTX! First mention of it I’ve seen. Otis elevators, Pratt and Whitney acft. engines, Sikorski choppers. Icky balance sheet.

    HCC – Nice financial statements for an insurer. Thanks much for the screen on this one. The only bug for me, is they are borrowing money to repurchase stock. But this is common these days, since bond interest is deductible to the company before taxes, and dividends are paid with after tax money. No stock is perfect, and this one interests me enough to investigate some more. Thanks again; nice find.

    @ Lowell Herr: you are correct when comparing to bank APY. However, yield on cost has been tracked by dividend investors since the dawn of the stock market. A guy named Graham more or less codified it for future generations. Allow us to use the word improperly – we know what it truly means, and are not deluded … I think anyways :)

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