Growth or yield? In a perfect world, income investors would want both from their investments and would not be interested in investments that offer neither. This is where the common ground ends and the debate begins. Without the benefit of a perfect world, we are left with the middle ground which is a balancing act between growth and yield. How much yield are you willing to give up for growth at a certain level, and how much growth will you sacrifice for a higher yield?
Assuming known inputs, a model can easily be constructed that allows yield and growth to vary, but provide equal end-results (see D4L-PreScreen.xls). Unfortunately, in the real world there is no such thing as "known inputs" when projecting the future. Hence, risk is introduced to the equation.
Higher yield or growth brings with it a higher risk of sustainability. Most income investors wouldn't mind a stock that yielded 20% with no growth, or a stock with an initial yield of 0.5% growing at 100% per year. If either of these were offered to us, we would immediately know that neither are sustainable in the long term.
Based on our individual financial makeup and appetite for risk, we will select an acceptable range of target yields and dividend growth rates. As a quick-and-dirty test when evaluating the yield/growth balance, I look for yields between 2.5% and 5.0% that when added to the stock's dividend growth rate equals a number greater than 12%.
This relationship provides for dividends that will double in a little over 10 years. It is far from precise and is not a substitute for running a spreadsheet model, but it does provide me a quick reasonableness check.
This week week, I screened my dividend growth stocks database for companies with dividend yield between 2.5% and 5.0% and a combined yield plus dividend growth of 12% or more. The results are presented below:
Yield: 2.5% | Dividend Growth: 11.8%
Colgate-Palmolive Company (Colgate) is a major consumer products company that markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories.
Wal-Mart Stores Inc. (WMT)
Yield: 2.5% | Dividend Growth: 13.3%
Wal-Mart Stores, Inc. is the largest retailer in North America. Wal-Mart operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets.
Air Products And Chemicals Inc. (APD)
Yield: 2.5% | Dividend Growth: 9.9%
Air Products and Chemicals Inc. is a major producer of industrial gases and electronics and specialty chemicals also has interests in environmental and energy-related businesses.
Owens & Minor,Inc. (OMI)
Yield: 2.6% | Dividend Growth: 13.2%
Owens & Minor Inc. is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
AFLAC Incorporated (AFL)
Yield: 2.7% | Dividend Growth: 15.0%
Aflac Incorporated provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at work sites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
McDonald's Corporation (MCD)
Yield: 2.7% | Dividend Growth: 15.0%
McDonald's Corporation is the largest fast-food restaurant company in the world, with about 32,900 restaurants in 117 countries.
General Dynamics (NYSE:GD)
Yield: 2.8% | Dividend Growth: 10.8%
General Dynamics is the world's fifth largest military contractor and also one of the world's biggest makers of corporate jets.
Microsoft Corporation (NASDAQ:MSFT)
Yield: 2.9% | Dividend Growth: 14.3%
Microsoft, the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
Intel Corporation (NASDAQ:INTC)
Yield: 3.1% | Dividend Growth: 13.3%
Intel Corporation is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products.
Watsco Inc. (NYSE:WSO)
Yield: 3.5% | Dividend Growth: 15.0%
Watsco Inc. is the largest U.S. distributor of air-conditioning, heating and refrigeration equipment, and related products.
The Clorox Company (NYSE:CLX)
Yield: 3.5% | Dividend Growth: 9.1%
The Clorox Company is a diversified producer of household cleaning, grocery and specialty food products and is also a leading producer of natural personal care products.
ConocoPhillips Co. (NYSE:COP)
Yield: 3.6% | Dividend Growth: 15.0%
ConocoPhillips Co. was formed via the 2002 merger of Phillips Petroleum and Conoco, is the fourth largest integrated oil company in the world.
Nucor Corporation (NYSE:NUE)
Yield: 3.7% | Dividend Growth: 15.0%
Nucor Corporation is the largest minimill steelmaker in the U.S., and has one of the most diverse product lines of any steelmaker in the Americas.
Avista Corporation (NYSE:AVA)
Yield: 4.2% | Dividend Growth: 8.8%
Avista Corp. generates, transmits and distributes energy as well as engages in energy-related businesses. The company operates in two business segments.
Lockheed Martin Corp. (NYSE:LMT)
Yield: 4.3% | Dividend Growth: 17.9%
Lockheed Martin Corp. is the world's largest military weapons manufacturer, and is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales.
UniSource Energy (UNS)
Yield: 4.3% | Dividend Growth: 7.7%
Unisource Energy, through Tucson Electric Power Co., provides regulated electric service to over 392,000 retail customers in Southeastern Arizona.
Digital Realty Trust Inc. (NYSE:DLR)
Yield: 4.4% | Dividend Growth: 17.4%
Digital Realty Trust, Inc., a real estate investment trust (REIT), engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate.
Teco Energy Inc. (NYSE:TE)
Yield: 4.6% | Dividend Growth: 15.0%
TECO Energy Inc. owns Tampa Electric Co., which serves the Tampa Bay region in west central Florida and has significant diversified operations related to its core business.
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 210+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long LMT, NUE, COP, CLX, INTC, MSFT, GD, MCD, AFL, OMI, WMT, CL. See a list of all my dividend growth holdings here.
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