Why Dividend Growth Matters
Going on 12 years of a low-yield environment with no end in sight. Investors seeking income are feeling Pete Townshend’s poetic “meet the new boss, same as the old boss”.
The 10-year US Treasury yields hovering around 1.5-1.6%, where we were in 2012.
The US stock market (S&P 500 Index) isn’t much better with dividend yield at 1.8%, where it was in 2011. But here lies the land of opportunity (and several risks) for investors seeking income and capital appreciation. The problem is some investors will focus (and reach) on high yielding stocks without care of price, quantitative or qualitative factors of a company. Big mistake.
Pop Quiz: In 10 years would you rather have Company A with a 4.0% dividend yield or Company B with a 1.8% dividend yield?
Answer: It depends.
Important variables include:
Share price movement (gain/loss)
Ability to sustain the dividend from profits
Growth of dividend from excess free cash flow
Power of Dividend Growth. Suppose investment $10,000 into Company A ($100 share, 4% yield) has annual 2% dividend growth, meaning $4.00, $4.08 and by Year 10 is $4.78 or $478 for income.
Meanwhile, $10,000 in Company B ($100 share, 1.8% yield) has annual 12% dividend growth, meaning $1.80, $2.02 and by Year 10 is $4.99 or $499 in income.
Yes, in 10 years Company B at $499 is generating more income than Company A at $478. Meanwhile, that 10-Year US Treasury is maturing with $150-$160 as last annual payment.
Now look out 5 more years, in Year 15 Company B is paying $879 while Company A is $527 on same initial $10,000 investment or a yield on cost of 8.79% to 5.27%.
Yield On Cost is an important measure for those seeking dividend growth. Simply divide the current dividend per share by the cost basis per share (price you purchased the stock). Then, multiply by 100 to derive a percentage. Reinvesting dividends will also grow an investor’s yield on cost, even if the share price does not change over the holding period.
Yes, a lot of numbers behind dividend investing. Evolve beyond yield to not get fooled again.
In italics… (didn’t count as part of 350 words)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a Certified Financial Planner™, Chartered Retirement Planning Counselor and fee-only fiduciary helping savers, business owners and Sandwichers evolve their financial independence.
This article appeared in the March editions of Holliston Local Town Pages, Ashland Local Town Pages and Natick Local Town Pages.
Please call me at (508) 834-7733 or directly schedule a meeting to learn more about considerations for planning and investing so you can balance kids, aging parents and your financial independence.
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