07-09-2014, 09:24 AM
(07-09-2014, 01:49 AM)Be Here Now Wrote:(07-08-2014, 11:27 PM)Ok Red Wrote: It's also clear that eventually the LYHG will catch up and overpass the HYLG equity. When that occurs is the pertinent question. For those of us with short time frames to retirement, that is the key.
Let's analyze the same two companies using dividend data from longrundata and the CCC list.
The 1 year DGR for UNP is 18.9%, so you can see the rate of increase is slowing. According to Robert Allan Schwartz' database, a dividend growth rate of 20% has been maintained by only one company for at most 9 years, so we can expect 18.9% to be the maximum DGR going forward. Its current yield is 1.70%.
The 1 year DGR for MAIN is 55%. That is clearly not maintainable for even one year, so lets call it 8% going forward. Its current yield is 6.10%.
If you were to make 2 investments like these two, today, and were interested only in the dividend dollars received (retired and spending the income), then the cumulative income received from MAIN would exceed the cumulative income received from UNP for 20 years (taxes ignored). We know that UNP will not maintain 18.9% growth for 20 years, and realistically not for 10. If we assume 15% instead of 18.9%, then it takes 28 years for UNP to match MAIN. If we assume 10% instead of 15% then UNP never catches MAIN.
This analysis really has nothing to do with how you invest before retirement. Until you retire, you do not necessarily need to invest in MAIN in preference to UNP. If I were in this position, I would want to maximize my portfolio value at my retirement date, and then convert to HY stocks if I did not already own them. In other words, deciding you want to own HY stocks during retirement does not necessarily mean you need to own them before retirement. My guess is 'not' because you can pretty easily prove to yourself that HY is not high total return. Stocks that yield 3-4% are in the sweet spot for dividend total return.
I have developed a spreadsheet that compares the total income received from two different investments, each with its own starting yield and dividend growth rate, no reinvestment. If you are interested, PM your email address to me at Seeking Alpha.
This is especially true when investing in a tax sheltered account, where the only costs of switching from UNP to MAIN at retirement are the $20 or so in broker costs you'll be charged for selling one and buying the other.
It becomes a bit more complicated in a cash account however, where you will need to weigh the effect of taxes on capital gains.