Bird In The Hand

[TomK]

I've been mulling the dividend yield versus dividend growth question a lot today. I feel like the majority opinion here has been that, especially for investors with a while to go before retirement, it is more important to emphasize dividend growth (assuming of course that stocks with high values for both are rare).

I can see the logic of that, especially on a spreadsheet. But the more I think about it, the more I feel that a higher starting yield deserves higher weighting. I think what it boils down to for me is that dividend growth rates are backwards looking. A company that has grown the dividend by 20 percent on average for the past five years is almost certainly not going to be able to maintain that pace for decades. And, depending on the assumptions you make, it might take more than a decade for a low-yielding stock with a high growth rate to surpass the value of a higher-yielding stock with a more average growth rate.

A higher initial yield is a bird in the hand; a high dividend growth rate is two in the bush.

[hendi_alex]

I always liked the term 'cash cow' to describe these kinds of investments. For the retired person they juice the overall yield of the portfolio. For someone in the accumulation phase they give a reliable stream for accumulating even more shares of the DG types of stocks. IMO they help provide a nice balance between growth and current income, as long as yield is not chased too aggressively and as long as such positions are not given excessive weighting.

[rnsmth]

It is not an either or, in my view. I think well constructed DG portfolio will have some of both - and some high yield, high growth companies like LMT as well.

There are many utilities and REITs on the Dividend Champions, Contenders and Challengers list. It is a good place to start a search for higher yield, acceptable growth and number of years of dividend increases. These are dividend growth companies. There is no set percentage a company has to hit in order to be a dividend growth company, it just needs to have a history of increasing the dividend. One could certainly use the Chowder number to set theor own, personal definition.

Me, I have a couple of what I call emerging DGR companies - a history of fewer than 3 years of increases

[Kerim]

I've advocated the idea of "yield diversity" before, which sounds something like what rnsmth is talking about. A large enough dividend growth portfolio can have a nice mix of higher yield / lower growth stocks and lower yield / higher growth stocks.

That said, in choosing between two stocks, all else being equal, I tend to agree with your premise, Tom, that the higher initial yield is a "sure thing" that deserves some preference over dividend growth, which may or may not continue into the future in such a way as to compensate for the lower initial yield.

[Dividend Watcher]

I keep coming back to this thread but not sure what I wanted to add. I basically agree with what everyone has said. Now I think I've figured out what I wanted to add ...

I think the diversity in yield and growth rate will help average out your growth rate to a more consistent rate you can plan for. Another way of looking at it is that your higher yielders (is that a word?) can provide the bulk of your income stream in the earlier distribution years giving time for the lower yields and higher growth rates to "catch up" and the take over the bigger component of your dividend stream.

This may be something to think about based on your stage in your investment career. For an older person on the cusp of retirement and planning on funding their lifestyle from the income produced, you may want to emphasize the higher yield component more and have fewer fast growers that can add significantly to income 10-15 years into retirement. The younger fellas may want to focus more on the lower yield but faster growers (especially with a lower payout ratio) since they have much more time for compounding the yield to grow into their desired income stream. Along with the faster growth in the dividend, you may also capture more capital appreciation along the way albeit that you may experience more volatility along the way.

I am reminded of Robert Allan Schwartz' dividend growth site here which categorizes the companies and their growth streaks. Only 14 companies were able to grow their dividends at 10% annually for 10 years. This out of 660 dividend growth companies he starts out with.

[Kerim]

Here is an interesting article from Tim McAleenan on SA arguing that higher yielders also tend to deliver the best capital gains, supporting the notion that higher initial yield may be good for even younger folks. Note that he suggests that the phenomenon is dominated by energy and tobacco companies, though.

Thanks for the reminder about Robert Allen Schwartz's site, DW; I meant to add that to the "resources" sticky a while back but think I forgot. Will add it now.

[Be Here Now]

(03-19-2014, 03:59 PM)TomK Wrote: I think what it boils down to for me is that dividend growth rates are backwards looking. A company that has grown the dividend by 20 percent on average for the past five years is almost certainly not going to be able to maintain that pace for decades.

Robert Allan Schwartz has a web site that tracks dividend histories. One of its features is a list of companies that have increased their dividend by at least X% per year for at least Y years: http://www.tessellation.com/dividends/streaks.html

The longest streak of 20% increases is 9 years, and only one company has done it, ARG, and its current yield is 1.8%. This is the type of statistic that has prompted me to invest in medium- to high-yielders for the majority of my portfolio. That 'two in the bush' is often a very small 'two'. As a retired investor who spends some of my dividends, I am much more interested in current yield that in the total return you get with stocks like ARG.

[EricL]

ARG may not be attractive now with its 1.8% yield and its 22 PE, but don't disparage the low yielders, they can produce some great capital gains. Also some outstanding YOC down the road.

Here is the FAST Graph for Airgas (ARG) had you bought it at the end of 2000 and reinvested dividends along the way. Notice the initial yield of just 2.4%.

   
   

It has an average annual return of 24% and a YOC at the end of the period of 26.3%. In 13 years, $10K invested would have turned into nearly $179K.

Now I'm not saying all of your investment money should be tied up in these types of companies, but if you're a younger investor or have more than a decade until you need to start drawing from your investments, you could be missing out on some great capital gains.

I'm 35 and have a 50 position dividend growth portfolio. Right now exactly half of those stocks are yielding under 2.5% with an overall portfolio yield of 2.85% and a YOC after one year of 3.38%.

I think Blue Chip cash cows are great, but there is plenty of room for the high growth stocks in my portfolio as well.

[Dividend Gamer]

(03-26-2014, 08:46 PM)EricL Wrote: ARG may not be attractive now with its 1.8% yield and its 22 PE, but don't disparage the low yielders, they can produce some great capital gains. Also some outstanding YOC down the road.

Here is the FAST Graph for Airgas (ARG) had you bought it at the end of 2000 and reinvested dividends along the way. Notice the initial yield of just 2.4%.




It has an average annual return of 24% and a YOC at the end of the period of 26.3%. In 13 years, $10K invested would have turned into nearly $179K.

Now I'm not saying all of your investment money should be tied up in these types of companies, but if you're a younger investor or have more than a decade until you need to start drawing from your investments, you could be missing out on some great capital gains.

I'm 35 and have a 50 position dividend growth portfolio. Right now exactly half of those stocks are yielding under 2.5% with an overall portfolio yield of 2.85% and a YOC after one year of 3.38%.

I think Blue Chip cash cows are great, but there is plenty of room for the high growth stocks in my portfolio as well.

Yeah, at 26, I want to buy a bit of everything. I have no limit on total number of stocks owned.
The way that I look at it is this; I only invest with money that I have left over from my job, whatever I buy is my money going out to work for me. At this point, that is not a lot of money, but over time it will grow as my income rises.

Why wouldn't I want it invested in a great multitude of companies that are spread across a wide avenue of streets within the stock market nation.