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Wed. Jul. 7, 2010

7 Dividend Stocks For The Ultimate In Deferred Gratification *

Deferred gratification is a principle where one or more people choose to postpone near-term benefits in order to enhance their chances of greater benefits in the future. In our microwave society marked by the ‘I want it now’ attitude, it is unusual to find someone willing to wait. However, deferred gratification is essential for anyone wanting to build wealth and is a key ingredient in a successful dividend investing strategy.  Consider these choices:

Entertainment or Equities

The first difficult decision we need to make is to stop buying the “stuff” we want, like wide screen TVs, computers, fancy cars, nice vacations, etc., and instead divert a portion of the money into some form of savings. The inability to exercise this remedial level of self control has put many families on the road to insolvency.

Trading vs. Investing

The desire for instant gratification does not stop once we chose investing over entertainment. Many new investors start out as traders – ‘I want to buy a stock today so I can sell it for a BIG profit tomorrow.’ Very few can succeed doing this, for the rest of us it is a recipe for financial ruin.

Dividend Income vs. Dividend Growth

Even those investors that ultimately end up applying an income-based strategy must still face the question of deferred gratification. Do you want to buy a stock with a high yield and high current income or do you want to buy a stock with a modest, steadily growing dividend? If all stocks were created equal, then this would be a fairly simple question, but they are not.

Dividend Growth Stocks For The Long-Term

Below are several dividend growth stocks that provide a good mix of yield and growth that result in an 8-10% Yield on Cost (YOC) in 10-years:

Dividend Current 10-Yr
Company Analysis Growth Yield YOC
J&J (JNJ) Link 8.42% 3.57% 8.02%
Abbott Labs (ABT) Link 8.27% 3.70% 8.19%
Northeast Utilities (NU) - 7.56% 3.99% 8.28%
Kimberly-Clark (KMB) Link 6.67% 4.36% 8.33%
Colgate (CL) Link 12.48% 2.58% 8.36%
Harleysville Grp (HIGC) Link 8.00% 4.32% 9.33%
T. Rowe Price (TROW) Link 15.00% 2.48% 10.02%

Last June, I updated you on a retirement-age couple that would never retire because they chose to devote their life to instant gratification – always spending a little more than they made. Since last year, things have continued to go down for Bill and Jackie (not their real names). Due to the economy and health problems, they are unable to generate a steady income. They moved out of their house and stopped making the payments on it. The bank has not yet foreclosed on the house. Their family continues to provide for them, in spite of their own financial issues.

We define our future by the choices we make.

Full Disclosure: Long JNJ, ABT, KMB, CL, HGIC. See a list of all my income holdings here.

(Photo: Steve Woods)

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2 Responses to “7 Dividend Stocks For The Ultimate In Deferred Gratification *”

  1. Very interesting post. I think that it’s important to have a clear objective (such as the one you have) to avoid starting to live off of the dividend income when it could be used to accelerate growth. And entertainment is very true. Every 100$ spent for entertainment can be seen as 10$ per year for decades…. certainly makes us think about it before spending!

  2. Hope to Prosper says:

    Great article.

    I thought about buying some T. Rowe Price stock (TROW), since they are such a well run company. But, I already have mutual funds with them and I was nervous about the lack of diversification.