Deferred gratification is a principle where one or more people choose to postpone near-term benefits in order to enhance their chances of greater benefits in the future. In our microwave society marked by the "I want it now" attitude, it is unusual to find someone willing to wait. However, deferred gratification is essential for anyone wanting to build wealth and is a key ingredient in a successful dividend investing strategy. Consider these choices:
Entertainment or Equities
The first difficult decision we need to make is to stop buying the "stuff" we want, like wide screen TVs, computers, fancy cars, nice vacations, etc., and instead divert a portion of the money into some form of savings. The inability to exercise this remedial level of self-control has put many families on the road to insolvency.
Trading vs. Investing
The desire for instant gratification does not stop once we chose investing over entertainment. Many new investors start out as traders: "I want to buy a stock today so I can sell it for a BIG profit tomorrow." Very few can succeed doing this. For the rest of us it is a recipe for financial ruin.
Dividend Income vs. Dividend Growth
Even those investors that ultimately end up applying an income-based strategy must still face the question of deferred gratification. Do you want to buy a stock with a high yield and high current income or do you want to buy a stock with a modest, steadily growing dividend? If all stocks were created equal, then this would be a fairly simple question, but they are not.
Dividend Growth Stocks for the Long Term
Below are several dividend growth stocks that provide a good mix of yield and growth that result in an 8% to 10% Yield on Cost (YOC) in 10 years:
Current Yield: 2.6% | Div. Growth: 13.48% | 10-yr Yield: 9.14%
Current Yield: 3.3% | Div. Growth: 15.00% | 10-yr Yield: 10.99%
Current Yield: 3.2% | Div. Growth: 10.50% | 10-yr Yield: 8.60%
Sunoco Logistics Partners (SXL) is a master limited partnership (MLP) that was formed by Sunoco Inc. to acquire, own and operate a group of refined product and crude oil pipelines and terminal facilities.
Current Yield: 3.6% | Div. Growth: 11.15% | 10-yr Yield: 9.70%
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.
Current Yield: 3.4% | Div. Growth: 8.93% | 10-yr Yield: 8.04%
Current Yield: 3.5% | Div. Growth: 8.78% | 10-yr Yield: 8.08%
Magellan Midstream Partners LP (MMP) is engaged in the transportation, storage and distribution of refined petroleum products primarily through its 9,600-mile pipeline system.
Current Yield: 3.8% | Div. Growth: 8.11% | 10-yr Yield: 8.01%
Aqua America Inc. (WTR) is the second largest publicly traded water utility based in the U.S., serving nearly three million people in nine states.
Current Yield: 2.5% | Div. Growth: 7.64% | 10-yr Yield: 8.13%
W. P. Carey Inc. (WPC) is an investment firm that provides long-term sale-leaseback and build-to-suit transactions for companies worldwide and manages a global investment portfolio.
Current Yield: 5.2% | Div. Growth: 5.04% | 10-yr Yield: 8.12%
Current Yield: 5.5% | Div. Growth: 4.12% | 10-yr Yield: 8.20%
In the past, I had updated you on a retirement-age couple that would never retire because they chose to devote their life to instant gratification, always spending a little more than they made. Since the last update, things have continued to go down for Bill and Jackie (not their real names). Due to the economy and health problems, they are unable to generate a steady income. They moved out of their house, stopped making the payments on it and the bank foreclosed on the house. They lost what little equity they had in the house and now live in one of their children's rental homes. Their family continues to provide for them, in spite of their own financial issues.
We define our future by the choices we make.
Full Disclosure: Long WMT, MSFT, ABBV, O in my Dividend Growth Stocks portfolio. See a list of all my dividend growth holdings here.