The combination of dividend yield and dividend increases is critical to income investing success. Should I sell stocks that yield less than than I think I need and move the funds into a higher yielding stock?
If my stock raises the dividend enough perhaps my income will be better than the stocks that yield more. And then there is growth to consider.
Most conservative investors also expect some growth. Do you want income or do you want growth? The easy answer is you want both. But if you truly are an income investor your analysis of what to do must be based on rigid analysis of income.
Move Capital Gains to higher yielding stocks:
The best real life example is Genuine Parts Company, symbol GPC. GPC has been a stellar pick for income, income growth and total return. Since I picked GPC as a 2011Dividend Machine, the stock price has gone up about 75%. Income has increased an average of 9.69% per year over the past 5 years. Just look at their website and you will see how focused GPC is on dividend income and growth. GPC Investor
GPC would seem to be the perfect stock. Due to stock price appreciation, GPC's yield sunk to below 3% around September 2012, alhough the actual dividends were increasing at a nice clip. As an income investor, I have to decide if I should buy, sell or hold using rigid analysis.
Five stocks were paying more than 4% at the end of 2012. They were LG, MMP, POR, RSG, WGL.
What would have happened had the portfolio sold the GPC stake and bought one of these stocks. The table below illustrates the actual income I would have received had I held GPC versus selling GPC and investing those funds into one of these five stocks.
The only stock that paid out less was RSG. The stock that paid out the most was MMP followed by LG. Therefore, from a rigid income view the move to MMP or LG or a combination of the two would have been a good move.
Next I compared the dividend increases among these stocks. The table below shows that again MMP has provided the most vigorous income increases.
Income Plus Growth.
For those who question the income discipline, let us look at capital gain or as one might think of as lost opportunity. If you sell GPC you are losing the opportunity to benefit from capital gain if you think the stock price will increase at the same pace it has since we picked it as a Dividend Machine. The table below presents the data needed to evaluate income plus growth. Interesting that MMP is both the best income producing and first in income increases and first in capital gains.
Sell Dividend Machines that produce less than a 3% dividend yield and move it into another stock. How about MMP?
Disclosure: Long LG, MMP, RSG, WGL
Are any of these stocks Dividend Machines today? To be a Dividend Machine in 2015, a stock must yield a minimum of 3.5%, have earnings per share greater than dividend per share, averaged dividend increases of at least 4% per year over the past five years with a debt to equity ratio of 1 or less or within industry standard.
Dividend Machine Fundamentals of each of these five stocks are presented in the tables below.
MMP misses the mark on D/E ratio. MMP's D/E ratio is 1.75 and industry standard is 1.49.
WGL misses the mark on minimum yield. WGL has a yield of 3.43% and we want 3.5% ore more.
LG misses the mark on dividend increases. LG's five year dividend growth rate is only 3.29%.
POR misses the mark on yield and dividend growth rate. POR's dividend yield is 3.43% with a dividend growth rate of only 3.077%.
RSG misses the mark on dividend yield. RSG's yield is only 2.73%.
I am putting WGL on my watch list. Should the price sink to under $53 the yield would be 3.5% Another stock to consider for the watch list is LG. Perhaps they will substantially increase the dividend next quarter and make up for a weak dividend growth history.
Then again, stay tuned and perhaps we will find an even better Dividend Machine pick for 2015.