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Many dividend growth investors, myself included, are in search of investments that have the potential to return a high yield on cost at some point in the future. This is often achieved through a combination of moderate to high initial yield, dividend growth, and possibly reinvestment of dividends in the early years.

In this article, I share the results of a screen for consumer products oriented companies that have the potential to reach 25% Yield on Cost through dividends within 10 years. Achieving such a lofty investment goal means that the investment must return 25% of the original investment amount in dividends in year 10 alone.

Before going on, I want to be explicit that this screen is designed to use historical performance as one way to filter the vast number of investment opportunities to find potential investments that might meet an income generation goal. As it is based upon historical data, we must be cautious in extrapolating over-optimistically into the future without further due diligence, but it does provide us with a starting point.

To achieve the stated goal of 25% yield on cost in 10 years, I assume that an investor is reinvesting dividends and that the dividend per share is growing. Thus, we will be concerned with the current yield of a potential investment, a forecasted yield at which reinvestment will occur, and a forecasted dividend growth rate. Based upon these three numbers and the ideas developed in this Seeking Alpha article, we can forecast how long it would take the yield on cost to reach 25% should reality meet or exceed the forecasts.

Screen Methodology

  1. I began with David Fish's Dividend CCC spreadsheet, available here. To make this list, a stock must have raised its dividend every year for at least the past 5 years.
  2. I got the current dividend yield for each stock on the list based upon the current market price and the given yearly dividend distribution.
  3. To choose a yield at which future dividend reinvestment might occur, I took 90% of the minimum of the current yield and the 5-year average yield given by Morningstar.
  4. To choose a future dividend growth rate, I took 75% of the minimum of the 1-year, 3-year, and 5-year dividend growth rates given on the CCC spreadsheet.
  5. Based upon the current dividend yield, the chosen reinvestment yield, and the chosen dividend growth rate, I computed roughly how long it would take each stock to reach 25% yield on cost.

The Consumer Products companies that would reach our goal in 10 years or less are Church & Dwight (CHD), Darden Restaurants (DRI), Lorillard Inc. (LO), and Vector Group Ltd. (VGR).

Below is a chart showing the numbers used in the projections:

Ticker

Current

Yield

Reinvestment

Yield

Dividend

Growth Rate

Time to

25% YoC

CHD1.84%.99%30.9%8.18
DRI4.06%2.7%18%8.78
LO5.59%4.14%12.98%8.75
VGR10.17%9%3.75%7.05

In addition, if we hold the reinvestment yield fixed, we can solve for the minimum compound average dividend growth rate necessary to achieve 25% YoC in 10 years.

Ticker

Minimum DGR needed

to reach goal

CHD25.1%
DRI15.5%
LO10.84%
VGR.01%

Below is some basic information about each to help investors determine if they are worth further due-diligence.

Church & Dwight

Church & Dwight manufactures and markets household, personal care, and specialty products, including a number of familiar brands such as Arm & Hammer. The market capitalization is $8.4 billion. The dividend yield is 1.84%, and the dividend payment has grown at 45% over the last five years. The payout ratio is 38.4%. The TTM Price / Earnings ratio is 24.8, and the Price / Sales ratio is 2.92. The interest coverage ratio is 22.1x. Analysts are projecting just above 11.5% earnings per share growth over the next three to five years. Below is a chart from YCharts showing the dividend payment, earnings per share, and the dividend yield over the past 10 years.

CHD EPS Diluted Quarterly Chart

CHD EPS Diluted Quarterly data by YCharts

Investors interested in reading more might find "Church & Dwight: A Solid Growth/Dividend Investment in 2013" interesting.

Darden Restaurants

Darden is the largest manager of restaurants, including such chains as Olive Garden and Red Lobster. The market capitalization is $6.3 billion. The dividend yield is 4.06%, and the dividend payment has grown at 25.8% over the last five years. The payout ratio is 51.81%. The TTM Price / Earnings ratio is 14.1, and the Price / Sales ratio is .77. The interest coverage ratio is 2.6x. Analysts are projecting just above 6.6% earnings per share growth over the next three to five years. Below is a chart from YCharts showing the dividend payment, earnings per share, and the dividend yield over the past 10 years.

DRI EPS Diluted Quarterly Chart

DRI EPS Diluted Quarterly data by YCharts

Investors interested in Darden might find "3 Reasons Why Darden Is a Better Buy Than McDonald's" or "Darden Restaurants: Time To Exit" to be interesting.

Lorillard Inc.

Lorillard is a domestic tobacco producer and has the Newport brand. The market capitalization is $15 billion. The dividend yield is 5.59%, and the dividend payment has grown at 17.3% over the last three years. The payout ratio is 73%. The TTM Price / Earnings ratio is 14, and the Price / Sales ratio is 3.33. The interest coverage ratio is 13.1x. Analysts are projecting just above 9% earnings per share growth over the next three to five years. Below is a chart from YCharts showing the dividend payment, earnings per share, and the dividend yield over the past 10 years.

LO EPS Diluted Quarterly Chart

LO EPS Diluted Quarterly data by YCharts

Investors interested in Lorillard may find "Lorillard Levels the Playing Field" to be interesting.

Vector Group Ltd.

Vector Group is also a producer and retailer of tobacco. The market capitalization is $1.4 billion. The dividend yield is 10.17%, and the dividend payment has grown at 5% over the last five years. The payout ratio is 452%. The TTM Price / Earnings ratio is 45.1, and the Price / Sales ratio is 2.36. The interest coverage ratio is 1.2x. Analysts are projecting just above 8.7% revenue growth (Fidelity did not have earnings estimates) over the next three to five years. Below is a chart from YCharts showing the dividend payment, earnings per share, and the dividend yield over the past 10 years.

VGR EPS Diluted Quarterly Chart

VGR EPS Diluted Quarterly data by YCharts

Investors interested in reading more about Vector might start with "Are the Yields Safe For These High-Yielding Stocks?"

Data presented by this screen is in its raw form. Some of the companies identified may not be sound investments due to underlying fundamentals. Others may be worth further due diligence.

Data in this article was sourced from the CCC spreadsheet, Morningstar, and Fidelity.

Source: 4 Consumer Products Stocks With The Potential To Reach 25% Yield On Cost In 10 Years