In a perfect world, income investors would not have to choose between growth or yield — they could have both. 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% that when added to the stock's dividend growth rate it sums to 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 3.5% and 5.0% and a combined yield plus dividend growth of 12% or more. The results are presented below:
Watsco Inc. (NYSE:WSO)
Yield: 3.6% | Dividend Growth: 8.6%
Watsco Inc. is the largest U.S. distributor of air-conditioning, heating and refrigeration equipment and related products. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 11 consecutive years.
Raytheon Company (NYSE:RTN)
Yield: 3.6% | Dividend Growth: 9.9%
Raytheon Company, the world's sixth largest military contractor, specializes in making high-tech missiles, advanced radar systems and sensors, defense electronics, and missile-defense systems. The company has paid a cash dividend to shareholders every year since 1964 and has increased its dividend payments for eight consecutive years.
Hasbro Inc. (NASDAQ:HAS)
Yield: 3.7% | Dividend Growth: 16.8%
Hasbro Inc. holds a broad portfolio of toys, games and entertainment offerings including brands such as Transformers, Playskool, Monopoly and My Little Pony. The company has paid a cash dividend to shareholders every year since 1981 and has increased its dividend payments for 10 consecutive years.
Southside Bancshares Inc. (NASDAQ:SBSI)
Yield: 3.7% | Dividend Growth: 9.9%
Southside Bancshares Inc. owns Southside Bank, which primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations. The company has paid a cash dividend to shareholders every year since 1969 and has increased its dividend payments for 17 consecutive years.
Darden Restaurant Inc. (NYSE:DRI)
Yield: 3.7% | Dividend Growth: 16.3%
Darden Restaurant Inc. operates the Red Lobster, Olive Garden, Bahama Breeze and Seasons 52 chains, as well as the LongHorn Steakhouse and Capital Grille chains, which it acquired in October 2007. The company has paid a cash dividend to shareholders every year since 1995 and has increased its dividend payments for eight consecutive years.
Intel Corporation (NASDAQ:INTC)
Yield: 4.2% | Dividend Growth: 11.3%
Intel Corporation is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. The company has paid a cash dividend to shareholders every year since 1992 and has increased its dividend payments for nine consecutive years.
Digital Realty Trust Inc. (NYSE:DLR)
Yield: 4.4% | Dividend Growth: 15.0%
Digital Realty Trust Inc., a real estate investment trust (REIT), that owns, acquires, repositions and manages technology-related real estate. The company has paid a cash dividend to shareholders every year since 2005 and has increased its dividend payments for nine consecutive years.
Meredith Corp. (NYSE:MDP)
Yield: 4.5% | Dividend Growth: 13.0%
Meredith Corp. derives its earnings mainly from magazine publishing (primarily Better Homes and Gardens and Ladies' Home Journal) and ownership of 12 TV stations. The company has paid a cash dividend to shareholders every year since 1930 and has increased its dividend payments for 20 consecutive years.
Lockheed Martin Corp. (NYSE:LMT)
Yield: 4.9% | Dividend Growth: 20.0%
Lockheed Martin Corp. is the world's largest military weapons manufacturer, is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales. The company has paid a cash dividend to shareholders every year since 1995 and has increased its dividend payments for 10 consecutive years.
ConocoPhillips Co. (NYSE:COP)
Yield: 5.1% | Dividend Growth: 9.1%
ConocoPhillips Co. is one of the largest independent oil and gas exploration and production (E&P) companies in the world. COP spun off its downstream assets in May 2012. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 12 consecutive years.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 220+ 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 RTN, INTC, LMT, COP in my Dividend Growth Portfolio and DLR, MDP in my High-Yield Portfolio. See a list of all my dividend growth holdings here.
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