As dividend growth investors we understand the danger of focusing on high yield alone. Many, if not most, high yields are simply not sustainable over the long term. However, we often turn our heads to what can be an equally dangerous metric – high dividend growth rates. Like high yields, high dividend growth rates often are not sustainable. As a company grows and matures, incremental sales and earnings are harder to come by. So what is a good mix of yield and growth?
Consider the following table:
The first column is the initial yield of the stock. The second column is the dividend growth rate over the period. The final 3 columns are the yields on cost (YOC) after the 5th, 10th and 20th years. After 10 years, the YOC has either doubled (initial yields of 1%-4%), nearly doubled (initial yield of 5%) of exceeded 10% (initial yields of 6%-9%). After 20 years all the YOCs exceeded 10% except the 1% initial yield. Note that the sum of each initial yield and growth rate equals 12%, which is a nice rule of thumb to look for.
The following dividend stocks have a current yield + growth rate between 10%-12%:
|Abbott Labs (ABT)||3.63%||8.3%||11.90%|
|Harleysville Grp (HGIC)||3.77%||8.0%||11.77%|
|Northeast Utilities (NU)||3.24%||7.6%||10.80%|
|Buckeye Partners (BPL)||5.62%||5.1%||10.69%|
|McCormick & Co. (MKC)||2.25%||8.3%||10.58%|
|Intel Corporation (INTC)||2.91%||7.4%||10.35%|
|CenturyLink, Inc. (CTL)||6.68%||3.6%||10.25%|
|J.M. Smucker Co. (SJM)||2.46%||7.6%||10.11%|
|Procter & Gamble (PG)||3.09%||7.0%||10.05%|
|Aqua America (WTR)||2.73%||7.3%||10.01%|
There is no hard and fast rule to what initial yield + growth rate should equal. To be more conservative you could limit your selection criteria to less than 10%. This of course will lower the future YOC, but highlight stocks that should have a greater chance of performing. As always, a careful evaluation should be performed before buying or selling any stock.
Full Disclosure: Long ABT, JNJ, HGIC, KMB, INTC, CTL, PG, KO. See a list of all my income holdings here.
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