Consider the following table:
| Initial Yield | Growth Rate | Yr.5 | Yr.10 | Yr.20 |
| 1% | 11% | 1.7 | 2.8 | 8.1 |
| 2% | 10 | 3.2 | 5.2 | 13.5 |
| 3% | 9 | 4.6 | 7.1 | 16.8 |
| 4% | 8 | 5.9 | 8.6 | 18.6 |
| 5% | 7 | 7.0 | 9.8 | 19.3 |
| 6% | 6 | 8.0 | 10.7 | 19.2 |
| 7% | 5 | 8.9 | 11.4 | 18.6 |
| 8% | 4 | 9.7 | 11.8 | 17.5 |
| 9% | 3 | 10.4 | 12.1 | 16.3 |
The first column is the initial yield of the stock. The second column is the dividend growth rate over the period. The final 3 columns are the yields on cost (YOC) after the 5th, 10th and 20th years. After 10 years, the YOC has either doubled (initial yields of 1%-4%), nearly doubled (initial yield of 5%) of exceeded 10% (initial yields of 6%-9%). After 20 years all the YOCs exceeded 10% except the 1% initial yield. Note that the sum of each initial yield and growth rate equals 12%, which is a nice rule of thumb to look for.
The following dividend stocks have a current yield + growth rate between 10%-12%:
| Current | Growth | ||
| Company | Yield | Rate | Sum |
| Kimberly-Clark (KMB) | 3.0% | 7.1% | 10.1% |
| Northeast Utilities (NU) | 3.4% | 6.9% | 10.3% |
| W.P. Carey Inc. (WPC) | 5.3% | 5.2% | 10.5% |
| Nextera Energy (NEE) | 2.8% | 8.1% | 10.9% |
| McCormick (MKC) | 2.2% | 8.8% | 11.0% |
| Archer-Daniels (ADM) | 2.0% | 9.1% | 11.1% |
| Coca-Cola Co. (KO) | 3.2% | 8.1% | 11.3% |
| J.M. Smucker Co. (SJM) | 2.4% | 9.0% | 11.4% |
| General Dynamics (GD) | 2.0% | 9.4% | 11.4% |
| Colgate-Palmolive (CL) | 2.1% | 9.5% | 11.6% |
| Owens & Minor. (OMI) | 2.7% | 9.1% | 11.8% |
| Exxon Mobil (XOM) | 2.6% | 9.3% | 11.9% |
| The Clorox Co. (CLX) | 3.3% | 8.8% | 12.1% |
There is no hard and fast rule to what initial yield + growth rate should equal. To be more conservative you could limit your selection criteria to less than 10%. This of course will lower the future YOC, but highlight stocks that should have a greater chance of performing. As always, a careful evaluation should be performed before buying or selling any stock.
Full Disclosure: Long KMB, KO, GD, CL, OMI, XOM in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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Tags: [KMB] [NU] [WPC] [NEE] [MKC] [ADM] [KO] [SJM] [GD] [CL] [OMI] [XOM] [CLX]
