03-19-2014, 03:59 PM
I've been mulling the dividend yield versus dividend growth question a lot today. I feel like the majority opinion here has been that, especially for investors with a while to go before retirement, it is more important to emphasize dividend growth (assuming of course that stocks with high values for both are rare).
I can see the logic of that, especially on a spreadsheet. But the more I think about it, the more I feel that a higher starting yield deserves higher weighting. I think what it boils down to for me is that dividend growth rates are backwards looking. A company that has grown the dividend by 20 percent on average for the past five years is almost certainly not going to be able to maintain that pace for decades. And, depending on the assumptions you make, it might take more than a decade for a low-yielding stock with a high growth rate to surpass the value of a higher-yielding stock with a more average growth rate.
A higher initial yield is a bird in the hand; a high dividend growth rate is two in the bush.
I can see the logic of that, especially on a spreadsheet. But the more I think about it, the more I feel that a higher starting yield deserves higher weighting. I think what it boils down to for me is that dividend growth rates are backwards looking. A company that has grown the dividend by 20 percent on average for the past five years is almost certainly not going to be able to maintain that pace for decades. And, depending on the assumptions you make, it might take more than a decade for a low-yielding stock with a high growth rate to surpass the value of a higher-yielding stock with a more average growth rate.
A higher initial yield is a bird in the hand; a high dividend growth rate is two in the bush.