Showing posts with label Dividend yield. Show all posts
Showing posts with label Dividend yield. Show all posts

Sunday, August 6, 2017

High Dividend Yield or High Dividend Growth: Income Investor Dilemma

Recently I have had discussions with some friends and family members and people who email me about retiring with income that grows.   I cannot stress enough that you will need more money to live on in 20 years than you do today.   Therefore, your dividend income investing should be designed and implemented to fulfill this goal.

  • High Dividend Yield is available from quality stocks rather than bonds
  • Dividend Growth must be a consideration for a 20 year investment plan
  • A combination of high yield and dividend growth delivers the goods for income investors who expect to live at least 20 years

In this post I am revisiting the dilemma all income investors face when picking a stock.  Should I go for a stock with a high current yield or the stock with a higher dividend growth history.  We can only use history and our wits to decide if the future will mimic the past. None of us has a crystal ball.  You have the luxury of being able to find the dividend growth history of every stock under consideration.

I approach this analysis of high dividend yield or high dividend growth as an income investor who uses my stock dividends and other investment income to replace the salary I used to bring home.   There is no chance I could go back to work.  I don't particularly want to invade my principle for living expenses although there are plenty of articles out there telling me that it is ok to spend some principle provided I only take out 4%.    No, I want my investments to create enough income to live on today and in 20 years.

Mine are not the only blog posts that emphasize the need to double your income every 20 years.  I don't care what the inflation guru's report.  I now have two twenty year cycles where I can measure my fixed expenses and they have doubled twice.  I strongly encourage every retiree and every pre-retiree to write down your current fixed expenses multiply by 2 and figure out how to invest so you can create the income needed in 20 years.

Let's get to the analysis.   I have created a spreadsheet with a theoretical analysis and then I applied that technique to four commonly held dividend stocks.  I set up my spreadsheet so I can fill in the investment amount, the dividend yield, and the dividend growth rate and evaluate every stock I own and those I may want to buy.

I do not reinvest dividends in this analysis.  The theoretical analysis uses a comparison of a stock with a 2.5% dividend yield and 7% dividend growth and a stock with a 5% dividend yield but 2% dividend growth.   Take a careful look at the table below.




Notice your current income with the 5% yielder is of course much higher and stays higher than the dividend grower for about 15 years, then the dividend grower provides more income.    If you expect to hold your stock for longer than 15 years, the dividend grower is probably the better choice.

Of course you take a risk on either stock.  Some externality could make the high yielder reduce the payout.  Other factors could make the dividend grower slow the dividend growth.   This is where further study is important.  Know the industry, use your wits, look at revenue trends before you jump into either investment.

Now let's apply the analysis to two very well known stocks; stocks that have been the subject of many of my posts lately:  AT&T, symbol T is a high yield at just over 5%.  Telephone's stock price has been stuck a bit lately.  They can cover their dividend through free cash flow even though their debt has expanded.  

Telephone's 10 year dividend history shows an average 1.3% annual dividend increase.  I am using their most recent dividend increase of 2% for this 20 year analysis.   Telephone is trying to build growth in a very competitive and changing industry.   Only you can decide to buy T or not.  But if you do buy T and you expect to keep it for a while, take a look at your projected income in the table below.

Also included in this table is CVS Health, symbol CVS.  This is another stock in a changing and competitive industry.  CVS delivers only one half of Telephone's yield at just over 2.5%.  However, their long term dividend growth is huge (see the chart below.)  I used their most recent dividend increase of 17% as what I expect for the next 20 years.   Again, only you can decide if CVS is the right stock for your portfolio but if you do buy CVS, the table below is helpful at seeing how much income to expect from this dividend grower.


Comparative Table of Dividend Income:  Telephone a high yielder versus CVS a dividend grower.






Notice it only takes about five years for the big dividend increases from CVS to overtake the big yield delivered by T.   Project out 20 years and the difference is quite remarkable: $1,900 per year from CVS versus $280 from T.    I cannot predict with confidence that CVS is going to continue this dividend growth performance but they have done it for 10 years and that says a lot.

Comparative Table of Dividend Income:  NHI a high yielder versus LMT a dividend grower.


CVS is pretty extreme at 17% dividend growth rate so I selected two additional stocks for analysis.  National Health Investors has been a Dividend Machine a few times and I own it.  It is a high yielder at just about 5% but dividend growth is also decent at 5%.

I look for 4% dividend growth in my personal portfolio.  Four percent will deliver a solid double of my income in less than 20 years and is well above current estimated levels of inflation at about 2%.

Lockheed Martin is a very expensive stock and it too has been a Dividend Machine whose stock price has soared.   Ordinary investors who are not planning to use covered call options should not be embarrassed to buy fewer than 100 shares of a stock.   In this case I use 15 shares of LMT  or $4,427.85 for the analysis to keep the comparisons fairly even.   Lockheed Martin has a current yield of only 2.47% but has delivered an average of 33.33% per year in dividend increases.  What have they done for us lately?  LMT's most recent dividend increase was 10.30% and that is what I am using for this analysis.


 



Notice in this comparison it takes 13 years for the dividend grower LMT to catch up with the high yielding NHI.   The difference at the end of 20 years is not as powerful as the CVS, T comparison but it is a difference of $175 per year.  That just might cover a cost of specialty coffee in 2037.

Conclusion


Income investors have few choices today for creating the income we need to replace our salaries.  We need enough today to pay our bills but we also need income growth to cover the inevitable increases in our fixed expenses.  You are not going to get income growth using bonds.   Real estate is not an asset I cover here.  Dividend stocks are a very good way to secure current income and to get income growth.

The analysis uses similar investments in each of the four stocks and the theoretical projections. When projecting out 20 years, dividend growers out perform high dividend yield.  I personally will not just invest in growers.  I use a spreadsheet to look at a combination of stocks.

Lets say you invested in each of these four stocks for a total of about $16,000.  You have two high yielders and 2 high growers.   Your first year income would be $591.46 for a yield of  3.69%.   In 20 years your income would be $3,473.32 per year.  That is an increase in income of 48.64% and a yield on your original investment of 21.7%. 



I think we could live on that income and can rest better if you put pencil to paper or keyboard to spreadsheet and know what to expect.

M* MoneyMadam

Long NHI, T, CVS, LMT

















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Tuesday, May 14, 2013

JNJ or KMB ?




STOCK
YIELD
 JNJ
2.71%
KMB
3.1%
Johnson & Johnson or Kimberly Clark? 


The stock market is going up because, in my opinion, average investors are chasing the most recent winners.   The most recent winners are the big companies that pay dividends.  They hear over and over that these are the companies for income investors.  They can’t get any income from bonds and those stocks just keep going up.  It’s time to get in on this market at least a little.


Johnson & Johnson, JNJ


I do not think you should buy a stock like Johnson & Johnson, symbol JNJ at this time.   The dividend income has not kept up with the stock price.   The stock price has gotten ahead of the earnings.  Earnings drive dividends and the dividend is less than three percent.    If you already own JNJ and you receive more than three percent on your basis, stick with it.  You have a winner.  I think your dividend income will continue to increase.  But, if you buy JNJ today, with only a 2.7 percent yield, and the stock retraces its gains, you will be kicking yourself.


Kimberly Clark, KMB


If you have to invest today because your money is making you no money elsewhere, and you want what has worked lately, you could go with Kimberly Clark, symbol KMB.   You still risk losing value on your basis if the stock price goes down, but your basis will earn more than three percent and your income will increase every year and eventually, KMB will again reach all-time highs again.


Stick with your discipline.


TheMoneyMadam
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Sunday, November 25, 2012

Laclede Group Inc. dividend machine for Nov. 26, 2012

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Wednesday, November 14, 2012

Norfolk Southern, NSC Dividend Machine for week of 11/12/2012

Norfolk Southern Engine along KCS rail.
Norfolk Southern Engine along KCS rail. (Photo credit: Wikipedia)

Norfolk Southern, NSC is my Dividend Machine for this week  November 12, 2012

           

            In every crisis, an opportunity can be found.  The transports were killed today and today I looked for dividend machines and would you not know it, Norfolk Southern was the first company I found to qualify as a dividend machine.

 

          

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