Some of the best dividend paying stocks are companies that make lots of consumer staples. Many of these companies have relatively stable cash flows and dividends through time, making them very good choices for income streams in retirement portfolios. Today I want to compare and analyze two of these types of companies: Procter & Gamble (PG) and Kimberly-Clark (KMB).
Both of these companies have a great history of increasing their dividends in nearly every year since they began paying dividends. However, during the recession of 2007-2009 Kimberly-Clark only increased their dividend by 13% while Procter & Gamble increased theirs by 42%.
Let's take a look at some of the characteristics of Procter & Gamble and Kimberly-Clark.
PROCTER & GAMBLE:
1 Yr Div
5 Yr Div
1 Yr Div
5 Yr Div
You can see that Kimberly-Clark has a slightly higher dividend yield than Procter & Gamble, but Procter & Gamble has a higher one year and five year dividend growth rate. This presents a good case study in which company will give the investor a greater 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.
For this example I will assume that Procter & Gamble's dividend grows at an annual rate of 9% and Kimberly-Clark's dividend grows at 6%. I ran the following results in our free calculator called Dividend Yield And Growth.
It takes 3 years for the YOC for Procter & Gamble to break even with the YOC for Kimberly-Clark. Of course, due to compounding we see the YOC for Procter & Gamble explode upward eventually. But this assumes that the company can continue its relatively high rate of dividend growth going forward.
Interestingly, although the yield on cost breaks even after 3 years, the compounded returns take 6 years to break even. 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.
Another interesting way to look at this is, what does Procter & Gamble's dividend growth rate have to be in order for the returns to break even after only 3 years rather than 6 years? I kept Kimberly-Clark's dividend growth rate set at 6%. It turns out that Procter & Gamble's dividend must grow at a 14% annual rate in order for the returns to break even after 3 years.
Both of these stocks can be very nice additions to retirement portfolios. However, I am a bigger fan of Procter & Gamble because of their higher dividend growth rate, lower payout ratio, and recent history of increasing their dividend substantially during the recession of 2007-2009.
Lastly, I have found by plugging in various dividend yields into our Retirement Planner that finding dividend payers who can return just 2% more than bonds or other dividend payers can increase the time that funds last in retirement by more than a decade. The key is finding companies who will either pay a strong dividend or have serious dividend growth and have shown a culture of not cutting dividends when times get tough.