Monday, September 9, 2019

5 Dividend Growth Stocks With Strong Capital Appreciation

When we think of dividend stocks, yield is almost certainty what first comes to most peoples mind. The more sophisticated income investor will also consider dividend growth, and weigh the merits of taking a lower current yield in exchange for higher future income from a stronger dividend growth rate. However, there is something else that is often just an afterthought... capital appreciation.

Consider what would happen to a stock that has a long track record of raising its dividend but did not grow its share price as fast as its dividend. Soon the stock would have an enormous yield. If there were no fundamental problems with the stock, buyers would soon bid the price up as a result of pursuing the higher yield.

Put another way, barring fundamental problems with a stock its dividend growth rate and share price appreciation will grow at a similar rate over time, when all other things are equal.

Looking in my Dividend Growth Stocks Portfolio, there are several examples of income stocks with strong capital appreciation, including these that have more than doubled:

Apple Inc. (AAPL) is a prominent provider of hardware including iPhone smartphones, iPad tablets, Mac computers, wearables and iPod digital media players. I originally purchased the stock on 7/12/2016 at $97.38 per share. It is currently trading near $205 per share. Yield: 1.5%

Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis. I originally purchased the stock on 1/1/2013 at $26.29 per share. It is currently trading near $65 per share. Yield: 6.5%

Cincinnati Financial Corp. (CINF) is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations. I originally purchased the stock on 7/12/2010 at $27.12 per share. It is currently trading near $112 per share. Yield: 2.0%

General Dynamics (GD) is the world's fourth largest military contractor, and also one of the world's biggest manufacturers of corporate jets. I originally purchased the stock on 8/10/2010 at $63.54 per share. It is currently trading near $187 per share. Yield: 2.1%

Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. I originally purchased the stock on 10/14/2011 at $27.11 per share. It is currently trading near $135 per share. Yield: 1.3%

Yield and dividend growth are extremely important when building an income based portfolio. However, capital appreciation is a special treat that we can enjoy at the time of our choosing, or we may choose to let our heirs enjoy it. If we choose to let our heirs enjoy the capital appreciation, then the appreciation will never be taxed since the cost basis for inherited stock is usually based on its value on the date of the original owner’s death.

Full Disclosure: Long AAPL, ABBV, CINF, GD, MSFT,

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