Two Low Yield Dividend Stocks

In last few weeks, I have looked at dividend stocks (aristocrats and achievers) that have dividend yields of less than 2%. There is a school of thought among dividend crowd that low dividend yields will take more than 10, 12, or even 15 years to match income from high yielding CDs or money market accounts.

Furthermore, when low yield dividend stocks are compared to high yield dividend stocks, considering conservative dividend growth rates, low yielding stocks will often lag by significant amount.

I agree that, mathematically, there is no argument for low yielding dividend stock providing lower income. Purely based on numbers, it is always good to go for relatively higher yield dividends stocks. In general, the cut off used by dividends investors vary such as 2% absolute dividend yield, 3% absolute dividend yield, or dividend yield higher than market (i.e. S&P500 yield).

In general, I have always tried to compare dividend stocks yields to S&P500. But I have not had a minimum dividend yield floor value, below which I have not invested. Another aspect is, it is likely that the low dividend yield is perhaps due to the higher stock price which in turn could mean good quality stock.

As an example, I have been holding on to LOW stock for a while now. I tend to look for quality of the dividends, risk to dividends, and core competency of the company. Let us take two examples.

• John Wiley & Sons (JW.A) is in publishing industry where there is a general concern about industry’s continued decrease in profitability. Contrary to this trend, JW.A continues to have stable gross and operating margins, generates stable operating and free cash flows. Its core competency is digital publishing that focuses on the subscriber based products. It does not have to depend upon advertising revenue alone. Notwithstanding, the low payout and low dividend yields, the company will last longer than 10 years. Therefore, I believe low dividends yield alone should not be a show stopper.

• Becton, Dickinson and Company (BDX) is another example of low dividend yield stock. The company does not have excessively high debt levels and hence, is not affected by financial turmoil. It does not depend upon the credit markets. BDX generated more than half of its sales from outside of US which seems to be recovering faster than US economy. Yes, it does have challenges such as regulatory driven change in spending patterns, health care reforms, or recession driven slow down. But these issues will affect the whole industry and not BDX alone. Contrary to general belief, BDK operates in an industry with high barriers to entry. The quality and reliability requirements for end products in this industry are among the stringent ones. It has build business around its core competency which makes me think and believe that it will last for more than 10 years.

I am still in my early thirties and have a long way to go before I stop investing. So if I think the company has some core competency, competitive advantage, low risk to dividends, and will survive beyond ten years, then I am open to invest in such low yield dividend stocks. I believe the slow steady earnings will provide capital gains and help me moderate out total returns.

Comments

[Mistrofan:]

I like BDS a lot. And I think you are right with your self-assesment: the future dividend growth potential is more important then the current yield.

Sep 17 02:45 PM

[Mistrofan:]

BDX I meant...

Sep 17 02:46 PM

[Low Sweat I...:]

No Seeking Alpha articles on BDX for over two weeks, then two in one day. Hope you might enjoy mine as much I did yours.

I also find that including high quality but low yielding dividend-growers can benefit a portfolio, especially in terms of income growth. After just two years, 1.8% yielder growing their dividend at 10% a year will produce more dollars of income growth than a 6% yielder growing it at 3% a year. And the gap continues to widen over the long term.

I enjoy your dividend analyses.

Sep 17 02:47 PM

[David Van K...:]

There's something wrong with your math, After two years, a 1.8% stock growing its dividends at 10% per year will be yielding 2.2% on your cost. By contrast, a 6% yielder growing it 3% per year will be yielding 6.4% on your cost. At some point, the lines will cross, but not after just two years. It will take 13 years for the 1.8% yielder to reach the 6% yield on cost than the 6% yielder started with. That's alot of lost $$ over the years.

Sep 18 04:00 PM

[Low Sweat I...:]

Appreciate your comment, but I’m not referring to yield on cost or total income. I’m referring to income growth: incremental, new dollars from the dividend growth rate.

(Like you, I can’t imagine anyone, even me, proposing that a 1.8% yield would generate more total income than a 6% yield after two years. That would indeed be some Bizarro World math.)

Here’s an illustration of that income growth: a 1.8% yielder generates $180 the first year on every $10,000 invested. So at 10% dividend growth that is $18 of new, incremental income after the first year (on every $10K invested in such stocks), and close to $20 after the second. ($198 * 10%).

Every $10K in a 6% yielder generates $600 the first year -- much more total income, of course. And after the first year there’s also $18 in new, incremental income from the 3% dividend growth. Then after the second year, there is less than $19 of new income. ($618 * 3%).

And the differential in the dividend growth rates will widen the gap in new, incremental dollars of income, year after year.

So who even cares about dividend stocks that crank out more dollars of income growth?

Investors with balanced portfolios who get a good base income, but won’t get enough future income growth because their bond income is fixed and their dividend growth is low;

Income investors whose stock portfolios are too concentrated in traditional high yield industries and so could benefit from diversification into higher growth sectors, but still want some dividend benefit;

Dividend investors who view dividend growth as a sign of a healthy company with disciplined management and a solid business model, but are more interested in capital growth than current income.

I do like your overall dividend approach, by the way, and realize my original comment about income growth might have been a little obscure on a quick, first reading – so no ‘red thumb’ from me on your thoughtful rebuttal!


On Sep 18 04:00 PM David Van Knapp wrote:

> There's something wrong with your math, After two years, a 1.8% stock
> growing its dividends at 10% per year will be yielding 2.2% on your
> cost. By contrast, a 6% yielder growing it 3% per year will be yielding
> 6.4% on your cost. At some point, the lines will cross, but not after
> just two years. It will take 13 years for the 1.8% yielder to reach
> the 6% yield on cost than the 6% yielder started with. That's alot
> of lost $$ over the years.

Sep 18 09:37 PM