Yield vs Growth for Youth

[notexactly]

Hello Everyone!

I had an idea I wanted to discuss.

In terms of yield vs growth, since I am 22 years old and have a large amount of "time in the market" potential, should I primarily be focused in on the lower yield (Lower than %3) higher dividend growth companies?

Lets take for example WPC or AT&T. These companies have high initial yields but have less than ideal growth. AT&T has an initial yield currently at 5.6% but with an average yearly dividend growth of 4.2% over the past 19 years.

Versus, for example, Parker Hannifin, with an initial yield of 2.5% but a average yearly dividend growth of 10% over the past 19 years.

These questions are highly situational and depend on the investors goal. I am 22 years old and my goal is to be financial independent by 45. This leaves me with 23 years to realize my goal.

What would you guys reckon is a good ratio between growth and yield for youth investors? Is it unwise for investors with much more time to invest in higher yield/low dividend growth stocks?

[Caversham]

I'm 27 and I've settled for around a 50/50 mix of both low yield/high growth and high yield/low growth. My portfolio's current average yield is ~3.4%. The lowest yielder is ~2.3% and the highest yielder is ~7%. I generally don't look at companies yielding below 2.25-2.5%. I've generally found the Chowder Rule (Yield + Growth >= 12%) to be a good rule of thumb.

You should try plugging in different scenarios into one of the free DGI calculators on the internet. With the numbers you gave for PH vs T, it will take ~20 years for PH to reach an equivalent dividend income as T.

One thing you should keep in mind with the low yield/high growth companies is: Will they be able to grow their dividend at this pace for 20+ years?

[Dividendsrule]

To me it would probably depend on my time frame. When would you like to ultimately use your dividends as income, notexactly?

[notexactly]

(10-19-2015, 10:34 PM)Dividendsrule Wrote: To me it would probably depend on my time frame. When would you like to ultimately use your dividends as income, notexactly?

I am 22 years old, I want to be financially independent by 45 years old. So by 45 years old, I would like to use my dividends as income.

[rapidacid]

45-22 = 23 years to compound.

If your portfolio value is $10,000 with a yield of 3.4% you currently are receiving $340 a year in dividends. If you fully DRIP your portfolio at an average of 3.4% and your stable of quality companies bumps on average their dividend by 6.6% a year, your dividend income will compound at 10% a year. Starting at $340, compounding for 23 years at 10% a year will get you dividend income of $3,044 when you are 45 if you add no more dollars.

Same numbers, starting with $50,000 will get you $15,222 at 45 and $100,000 will get you to $30,444.

Save as much money as you can, add to your dividend portfolio regularly, don't sell too often if at all, do responsible diligence on any considered company, be honest with yourself and the money will follow. You are in an amazing spot to be considering this a life goal at such a young age. Good luck.

Edit: Just food for thought. If you can somehow find something you love doing and can make money doing it and call it a job and hold off retirement another 10 years when you're 55 years old your numbers ( with no more money added remember ) look like this:

$10,000 compounding at 10% for 33 years = $7,900 / yr
$50,000 compounding at 10% for 33 years = $39,482 / yr
$100,000 compounding at 10% for 33 years = $78,965 / yr

Retire at 65 and it's:

$10,000 compounding at 10% for 43 years = $20,481 / yr
$50,000 compounding at 10% for 43 years = $102,408 / yr
$100,000 compounding at 10% for 43 years = $204,816 / yr

[Dividendsrule]

Yeah for a 23 year time frame I'd go heavier on 3+ yields. But I'd throw a little bit of higher growth companies like V, DIS, NKE, EL, BEN, LOW etc for growth, too. But mainly over 3%, I would think.

RapidAcid, cool shortcut to determine future dividend income. I like it...Typically I use D Fish's DCA spreadsheet.

[notexactly]

(10-20-2015, 06:16 AM)rapidacid Wrote: 45-22 = 23 years to compound.

If your portfolio value is $10,000 with a yield of 3.4% you currently are receiving $340 a year in dividends. If you fully DRIP your portfolio at an average of 3.4% and your stable of quality companies bumps on average their dividend by 6.6% a year, your dividend income will compound at 10% a year. Starting at $340, compounding for 23 years at 10% a year will get you dividend income of $3,044 when you are 45 if you add no more dollars.

Same numbers, starting with $50,000 will get you $15,222 at 45 and $100,000 will get you to $30,444.

Save as much money as you can, add to your dividend portfolio regularly, don't sell too often if at all, do responsible diligence on any considered company, be honest with yourself and the money will follow. You are in an amazing spot to be considering this a life goal at such a young age. Good luck.

Edit: Just food for thought. If you can somehow find something you love doing and can make money doing it and call it a job and hold off retirement another 10 years when you're 55 years old your numbers ( with no more money added remember ) look like this:

$10,000 compounding at 10% for 33 years = $7,900 / yr
$50,000 compounding at 10% for 33 years = $39,482 / yr
$100,000 compounding at 10% for 33 years = $78,965 / yr

Retire at 65 and it's:

$10,000 compounding at 10% for 43 years = $20,481 / yr
$50,000 compounding at 10% for 43 years = $102,408 / yr
$100,000 compounding at 10% for 43 years = $204,816 / yr

Thanks for the break down Rapidacid.
The cost basis of my portfolio is approximately 10,000. I will probably focus on the 3+ yields, and sprinkle some AFL, UNP, PH type companies in there as well.

[crimsonghost747]

I like to make it balanced. Obviously high growth has it's own appeal since you are so young but I also love the high yield ones simply because the compounding effect is much greater in the beginning and in general there is not so much pressure to be pushing up earnings 10% yoy for decades because lets face it: very few companies can sustain such growth for long.

One thing to also think about is that while your ultimate goal is to be financially independend at 45, you don't know if you will get there. You might need cash a lot sooner if one of a million possible bad things happen, then it helps to have yield since the dividend income might help you through without having to sell your portfolio. Also, you definitely will need SOME level of growth since you are planning on living with your dividends for roughly 40 years or so... there is inflation and once again ANYTHING can happen during those years. So while financial independence at 45 is the goal, life doesn't stop there.

Guess it's up to you to find a good balance but make sure that you have at least some stocks from both types, that is also a form of diversification.

[EricL]

I think it is a great idea to mix in some of both in your portfolio, especially for younger investors with a long time to let the growth work.

This one is a bit dated, but I wrote an article back in March that shares my thoughts on it:

Don't Let Low Dividend Yields Keep You From Investing In These Great Companies

[notexactly]

(10-22-2015, 11:01 AM)EricL Wrote: I think it is a great idea to mix in some of both in your portfolio, especially for younger investors with a long time to let the growth work.

This one is a bit dated, but I wrote an article back in March that shares my thoughts on it:

Don't Let Low Dividend Yields Keep You From Investing In These Great Companies

Hey Eric,

I actually read your article last month. It's what got me really thinking in terms of growth. Thanks for sharing your ideas.

[notexactly]

(10-22-2015, 10:40 AM)crimsonghost747 Wrote: I like to make it balanced. Obviously high growth has it's own appeal since you are so young but I also love the high yield ones simply because the compounding effect is much greater in the beginning and in general there is not so much pressure to be pushing up earnings 10% yoy for decades because lets face it: very few companies can sustain such growth for long.

One thing to also think about is that while your ultimate goal is to be financially independend at 45, you don't know if you will get there. You might need cash a lot sooner if one of a million possible bad things happen, then it helps to have yield since the dividend income might help you through without having to sell your portfolio. Also, you definitely will need SOME level of growth since you are planning on living with your dividends for roughly 40 years or so... there is inflation and once again ANYTHING can happen during those years. So while financial independence at 45 is the goal, life doesn't stop there.

Guess it's up to you to find a good balance but make sure that you have at least some stocks from both types, that is also a form of diversification.

The goal is 45 years old ideally, I might have a job or a hobby that I enjoy which provides some income, or who knows, love my full-time and continue that. But in general, that is approximately what I'm aiming for. As you said, life continues, life happens, and things can change.

You make really interesting points about the higher yielders, thank you for that.

[crimsonghost747]

(10-22-2015, 07:16 PM)notexactly Wrote: The goal is 45 years old ideally, I might have a job or a hobby that I enjoy which provides some income, or who knows, love my full-time and continue that. But in general, that is approximately what I'm aiming for. As you said, life continues, life happens, and things can change.

You make really interesting points about the higher yielders, thank you for that.

Life does happen indeed. I'm just talking from personal experience here, you never know what's around the corner. I'm young too and quite frankly while the high growth stuff does have it's statistical appeal I prefer to go with high yield since well, life does happen. Right now I'm looking at about an estimated 1.5 years of being unemployed because my mom got sick and I'm taking care of her... certainly does not help with growing your portfolio. Thank goodness the hundreds of thousands in medical bills are being covered almost 100% by the public healthcare system. Point is, anything can happen and you never know when you need the cashflow. But once again... get some of both as the high growth ones, if they do keep growing, will reward you well in the future.