Here are some of the reasons an investor might forgo current yield in hopes of future gain...
Dividend Growth Provides For InflationInflation is the silent killer for many retirement portfolios. Over time, prices tend to increase. If you rely solely on a portfolio of long-term fixed income securities, you will lose purchasing power each year as inflation robs your portfolio. Dividend growth rates on traditional high-yield stocks (e.g. utilities, REITs, etc.) are often less than inflation. However, most blue-chip dividend growth stocks grow their dividends well in excess of the annual inflation rate.
Dividend Growth Often Provides For Higher ValueThe combination of a good starting yield and respectable dividend growth will often provide the investor with greater long-term value when compared to alternatives with higher current yields and lower growth dividend rates. The only way to know for sure is to run the numbers using a model such as my D4L-PreScreen.xls.
Compound Dividend Growth Is PowerfulCompound interest is what occurs when interest previously earned is added to the principle and is considered when calculating future interest – i.e. earning interest on interest. Compound dividends are like compound interest on steroids. Like compound interest, dividends are being reinvested. However, these dividends are growing which provides and added boost.
Conservative View Of Dividend GrowthThe dividend growth rate is a key metric in many calculations. As such, I use a conservative estimate as follows: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year compound annual growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.
10 Stocks With a 10%+ Dividend Growth Rate
Infinity Property and Casualty Corp. (IPCC) provides personal automobile insurance with a concentration on nonstandard auto insurance. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 12 consecutive years. Yield: 2.1% | Growth: 19.4%
Target Corp. (TGT) operates nearly 1,800 Target, SuperTarget and CityTarget general merchandise stores across the U.S. The company has paid a cash dividend to shareholders every year since 1965 and has increased its dividend payments for 48 consecutive years. Yield: 2.8% | Growth: 15.0%
Phillips 66 (PSX), spun off from ConocoPhillips in 2012, is one of the largest independent refiners and marketers of petroleum products in the U.S. The company (and its predecessor companies) has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 15 consecutive years. Yield: 2.9% | Growth: 15.0%
Lockheed Martin Corp. (LMT), the world's largest military weapons manufacturer, is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales. The company has paid a cash dividend to shareholders every year since 1995 and has increased its dividend payments for 13 consecutive years. Yield: 3.2% | Growth: 15.0%
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 2011 and has increased its dividend payments for 5 consecutive years. Yield: 3.2% | Growth: 15.0%
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. Yield: 3.2% | Growth: 15.0%
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. Yield: 3.3% | Growth: 15.0%
IBM's (IBM) global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 20 consecutive years. Yield: 3.6% | Growth: 14.5%
Caterpillar Inc. (CAT) is the world's largest producer of earthmoving equipment, and a big maker of electric power generators and engines used in petroleum markets, and mining equipment. The company has paid a cash dividend to shareholders every year since 1914 and has increased its dividend payments for 22 consecutive years. Yield: 4.7% | Growth: 10.2%
ConclusionIf time is on your side, you should investigate if certain lower yielding stocks with a dividend growth rate fits into your long-term investment strategy. When making this evaluation, it is important to note that the sustainability of the dividend growth rate must be evaluated on a go-forward basis. Like high-yield stocks, there is increasing risk as the dividend growth rises.
Full Disclosure: Long LMT, CSCO, TXN, MSFT in my Dividend Growth Portfolio, long IPCC, IBM in my High Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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