Don't forget the Growth part of the Dividend Growth equation. High current yield isn't everything. Total Return is important even in the DGI investing space. For DGI investing, the Chowder Number is a handy yardstick for total return. To get the Chowder number, just add the current yield to the 5yr average (annualized) dividend growth %.
So, if a stock has a current yield of 4% and has been growing dividends by 10% annually over the past five years, the Chowder Number is 14.
Rules of thumb for using the Chowder Number in different scenarios:
For Utilities and Telcos (typically high current dividend (4%+) and low growth - low risk income farms), Chowder Number of 8+ is considered a predictor of favorable total return
For other stocks with 3%+ current yield, Chowder Number of 12+ is considered a predictor of favorable total return
For other stocks with less than 3% current yield, Chowder Number of 15+ is considered a predictor of favorable total return
You can also use this methodology to assess the overall fitness of your DGI portfolio. Your portfolio itself has a Chowder Number. It is the current yield of all your holdings (total dividends paid divided by current value of portfolio), plus the 5yr average annualized dividend growth of your holdings (you have to do a weighted average if your holdings vary in size). This can help you assess whether your portfolio as a whole is generating sufficient total return.
As crimsonghost said, it will be exceedingly difficult to find a lot of high quality stocks with a 6% current yield. Thankfully, you don't have to. Over anything other than short-term holding periods, a low-dividend high dividend-growth stock will outperform a high-dividend low/no-growth stock. You can play both ends of the spectrum.
So, if a stock has a current yield of 4% and has been growing dividends by 10% annually over the past five years, the Chowder Number is 14.
Rules of thumb for using the Chowder Number in different scenarios:
For Utilities and Telcos (typically high current dividend (4%+) and low growth - low risk income farms), Chowder Number of 8+ is considered a predictor of favorable total return
For other stocks with 3%+ current yield, Chowder Number of 12+ is considered a predictor of favorable total return
For other stocks with less than 3% current yield, Chowder Number of 15+ is considered a predictor of favorable total return
You can also use this methodology to assess the overall fitness of your DGI portfolio. Your portfolio itself has a Chowder Number. It is the current yield of all your holdings (total dividends paid divided by current value of portfolio), plus the 5yr average annualized dividend growth of your holdings (you have to do a weighted average if your holdings vary in size). This can help you assess whether your portfolio as a whole is generating sufficient total return.
As crimsonghost said, it will be exceedingly difficult to find a lot of high quality stocks with a 6% current yield. Thankfully, you don't have to. Over anything other than short-term holding periods, a low-dividend high dividend-growth stock will outperform a high-dividend low/no-growth stock. You can play both ends of the spectrum.