07-10-2013, 09:30 PM
(07-10-2013, 09:04 PM)Lost Fish Wrote: Explain to me your focus on rate of dividend increase. I have always been focused more on dividend yield percentage, yknow, as a return on asset measure, but I feel like you're scratching at something maybe I should pay attention to.
Hey Lost Fish! Check out this post about dividend growth rate versus dividend yield. The yield itself is of course an important measure, but I also want my income stream from these stocks to grow over time, preferably at a rate that well outpaces inflation. If you look at a stock like T, you might be excited to buy its current yield of over 5 percent at recent prices. And that is fine and well. But T pays out a relatively high percentage of its earnings to give you that 5 percent, and there is not a lot of "headroom" in those earnings to grow the dividend. In each of the last four or five years, the dividend has grown by less than 3 percent each year ($1.64 in 2009, $1.68 in 2010, $1.72 in 2011, $1.76 in 2012, and on track for $1.80 in 2013). So the yield itself is solid, but the growth rate of the dividend is anemic.
Compare this to a stock like WAG. WAG has a low payout ratio, growing earnings, and they have been growing the dividend like gangbusters in recent years -- over 20 percent a year, except for 2013, which is *only* seeing an 18 percent raise ($0.50 in 2009, $0.625 in 2010, $0.80 in 2011, $1.00 in 2012, and on track for $1.18 in 2013). If you buy WAG today, your starting yield is around 2.6 percent, much lower than T. But given the relative growth rates of the dividends, if you are planning to hold for a long time, you can expect the income from WAG to catch and overtake the income from T at some point.
Whether that point is sooner or later depends on lots of factors, and most of those factors are based on guesses about the future. So who really knows. Perhaps you prefer the bird in the hand of a high initial yield like T, or perhaps you want "two in the bush" with a stock like WAG. But one important reason to prefer the latter is that the share price over time tends to follow the earnings growth and dividend growth rate. So you can hope for better capital gains holding WAG over the years as its dividend grows more quickly. Because my crystal ball is still broken, I own both T and WAG. T for the current income and WAG for its potential. I am much more excited / optimistic about WAG, though, and I take today's very healthy dividend raise as vindication of that excitement.
Of course, the holy grail for DG investors is finding a stock with a healthy current yield that also has a strong dividend growth rate. The two stocks on my watch list that meet that test are PM and LMT. At today's prices, I think PM is the better value of the two and the more conservative play. I bought some more PM on a recent dip.