Consider the following table:
|Initial Yield ||Growth Rate ||Yr.5||Yr.10||Yr.20|
The first column is the initial yield of the stock. The second column is the dividend growth rate over the period. The final 3 columns are the yields on cost (YOC) after the 5th, 10th and 20th years. After 10 years, the YOC has either doubled (initial yields of 1%-4%), nearly doubled (initial yield of 5%) of exceeded 10% (initial yields of 6%-9%). After 20 years all the YOCs exceeded 10% except the 1% initial yield. Note that the sum of each initial yield and growth rate equals 12%, which is a nice rule of thumb to look for.
The following dividend stocks have a current yield + growth rate between 10%-12%:
|Northeast Utilities (NU)||3.4%||6.9%||10.3%|
|W.P. Carey Inc. (WPC)||5.3%||5.2%||10.5%|
|Nextera Energy (NEE)||2.8%||8.1%||10.9%|
|Coca-Cola Co. (KO)||3.2%||8.1%||11.3%|
|J.M. Smucker Co. (SJM)||2.4%||9.0%||11.4%|
|General Dynamics (GD)||2.0%||9.4%||11.4%|
|Owens & Minor. (OMI)||2.7%||9.1%||11.8%|
|Exxon Mobil (XOM)||2.6%||9.3%||11.9%|
|The Clorox Co. (CLX)||3.3%||8.8%||12.1%|
There is no hard and fast rule to what initial yield + growth rate should equal. To be more conservative you could limit your selection criteria to less than 10%. This of course will lower the future YOC, but highlight stocks that should have a greater chance of performing. As always, a careful evaluation should be performed before buying or selling any stock.
Full Disclosure: Long KMB, KO, GD, CL, OMI, XOM in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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