When looking to build a longterm portfolio of stocks that pay high dividends, investors usually come up with a mix of stocks that either have high dividend yields or high dividend growth rates. It is difficult to find good companies that have both. This means that there is often a choice to be made. All else equal, should one invest in the company that has that enticing high dividend yield, but a low dividend growth rate, or does one exhibit patience and invest in the company with a relatively low yield, but a high dividend growth rate? To help answer this question, I looked at two companies that offer these different alternatives: KimberlyClark (NYSE:KMB) and WalMart (NYSE:WMT).


There are clear differences in the two companies' dividend yields as well as the growth rates. This presents a great case study in which company will give the investor a better return due to dividends over time. More specifically, I want to measure the Yield on Cost (YOC) and how it changes over time as well as the compounded annual return due to dividends. The YOC simply measures the annual dividend divided by the original investment in the company's stock.
I ran the following analysis in our free calculator called Dividend Yield And Growth. Starting with the simplified assumption that the growth rate of each dividend follows the one year growth rate, we see the following:
It takes about 13 years for the YOC for WalMart to break even with the YOC for KimberlyClark. Of course, due to compounding, we see the YOC for WalMart explode upward eventually. But this assumes that the company can continue its relatively high rate of dividend growth going forward.
Even more important than the YOC is the compounded total return over time. Even if we assume that WalMart's dividend growth rate continues at this relatively high rate, the compounded return for WalMart will never break even with KimberlyClark over a 20year time frame. It is also important to note that I do not consider any price appreciation in these calculations and compounded returns are due solely to dividends.
What if instead we used the fiveyear growth rate of dividends? In this scenario, WalMart will outperform over a 20year time frame. The compounded return vs. KimberlyClark will be 375% vs. 243%, and the annual rate of return will be 8.1% vs. 6.4%
These scenarios show just how important the growth rate of dividends are over time. When attempting to figure out which dividend payers to invest in, you should have an idea of what the dividend growth rate will be going forward. Otherwise, it is very tough to make a decision as to which investment will pay off in the long run.
Disclosure: I am long WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.