Here are some of the reasons an investor might forgo current yield in hopes of future gain...
Dividend Growth Provides For Inflation
Inflation 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 Value
The 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 Powerful
Compound 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 Growth
The 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
Lowe's Companies, Inc. (LOW) sells retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada. Yield: 1.8% | Growth: 17.1%
General Dynamics (GD) is the world's fourth largest military contractor, and also one of the world's biggest manufacturers of corporate jets. Yield: 1.8% | Growth: 10.3%
CVS Health Corporation (CVS) is the largest pharmacy health care provider in the U.S. Yield: 2.5% | Growth: 15.0%
3M Co. (MMM) provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives. Yield: 2.5% | Growth: 11.2%
Amgen Inc. (AMGN) is one of the world's leading biotech companies with major treatments for anemia, neutropenia, rheumatoid and psoriatic arthritis, psoriasis, cancer and osteoporosis. Yield: 2.6% | 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. Yield: 2.8% | Growth: 12.7%
Illinois Tool Works Inc. (ITW) is a diversified manufacturer that operates a portfolio of 60 business units that serve industrial and consumer markets globally. Yield: 2.9% | Growth: 11.2%
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. Yield: 3.0% | Growth: 20.0%
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. Yield: 4.1% | Growth: 10.2%
Cracker Barrel Old Country Store (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States. Yield: 3.3% | Growth: 15.0%
Conclusion
If 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 GD, TXN, ITW, CVS, MMM, CSCO, AMGN, ABBV, CBRL.
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