calculated fair value. However, capital appreciation is not the primary reason for investing in dividend stocks. Dividend fundamentals are what drive my purchase decision, and if I could only look at one metric it would be the Net Present Value of the Money Market Differential (NPV MMA Diff.)
Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a less risky money market account? When I look for worthy dividend investments, one of my first tests is to determine if the investment will perform better than a MMA over time. I use the NPV MMA Diff. calculation to help make this determination.
The basis of the NPV MMA Diff. calculation is a hypothetical $1,000 investment in a dividend stock and a Money Market Account. The value calculated is the net present value (NPV) of the differences between the dividend earnings of the stock and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at a consistent dividend growth rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. Once calculated, The NPV MMA Diff. is compared to a target amount.
The target is based on the number of consecutive years of dividend increases. The formula is: Target = Base - (Years x Increment) + Minimum where Base=3,000, Increment=100, Minimum=500. Thus 0 years yields a $3,500 target and 30 years yields a $500 target. The MMA rate is an estimate of the average rate earned over a 20 year period. This rate is periodically validated by looking at a 20 year Treasury rate. For more information on calculating the NPV MMA Diff, see the D4L-PreScreen spreadsheet.
Below is a list of 5 Star stocks that have a NPV MMA Diff. above their target and a yield at or above 2.5%:
3M Co. (MMM) provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 57 consecutive years.
NPV MMA Diff. % Above Target: 119.8% | Yield: 2.8%
Cisco Systems, Inc. (CSCO) offers a complete line of routers and switching products that connect and manage communications among local and wide area computer networks employing a variety of protocols. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 57 consecutive years.
NPV MMA Diff. % Above Target: 161.4% | Yield: 2.8%
Texas Instruments Inc. (TXN) is one of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors. The company has paid a cash dividend to shareholders every year since 1962 and has increased its dividend payments for 13 consecutive years.
NPV MMA Diff. % Above Target: 276.9% | Yield: 2.9%
Raven Industries Inc. (RAVN) is an industrial manufacturer that provides electronic precision-agriculture products, reinforced plastic sheeting, electronics manufacturing services, specialty aeronautics, and sewn products. The company has paid a cash dividend to shareholders every year since 1972 and has increased its dividend payments for 29 consecutive years.
NPV MMA Diff. % Above Target: 149.9% | Yield: 2.9%
T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund and life cycle fund complexes in the United States, with December 31 AUM of nearly $747 billion. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 28 consecutive years.
NPV MMA Diff. % Above Target: 556.1% | Yield: 2.9%
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 59 consecutive years.
NPV MMA Diff. % Above Target: 107.0% | Yield: 3.0%
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 14 consecutive years.
NPV MMA Diff. % Above Target: 349.3% | Yield: 3.0%
Some might ask, 'why not just target yields that are higher than the MMA Rate?' That ignores the most powerful concept of Dividend Income Investing - Dividend Growth. Compound interest (interest on interest) is a powerful concept, but growing, compound dividends is the income investor's most powerful ally.
Full Disclosure: Long MMM, CSCO, TXN, GPC, MSFT in my Dividend Growth portfolio. Long RAVN, TROW in my High Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
- Dividends vs. Stock Buybacks
- 5 Lessons Learned About Investing In Dividend Growth Stocks
- 6 High-Yielding Mega-Cap Stocks
- Dividend Investors Should Focus On Stocks, Not The Market
- The Secret Ingredient of Dividend Growth Stocks
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