If you are relatively familiar with the underlying metrics of Coca-Cola (KO) you might believe that my article heading was a typographical error; or otherwise a cheeky use of rounding. Here are the stats: KO closed at a price of $39.24 on Thursday, January 23rd and presently pays out a quarterly dividend of $0.28 a share. On an annual basis this translates to $1.12, for a current yield of 2.85%. At first blush it appears that those looking to correct my yield quoting blunder would have a solid case.
If you were to run a stock screen, the current yield would most certainly show 2.85% rather than 3%. Furthermore, for those with minimum yield requirements, such a security would surely escape the 3% or even 2.9% threshold. But here's the thing: in all likelihood Coca-Cola currently does meet the 3% yield criterion. Allow me to explain.
To a dividend investor - or any investor really - Coca-Cola needs no introduction. Today alone 1.8 billion servings of any one of Coke's 3,500+ worldwide products will be consumed. Perhaps even more striking is Coca-Cola's dividend payout record. For the past 94 years KO has paid a dividend and for the last 51 of those years Coca-Cola has been able to increase this payout. Think about that: over the years you had presidential scandals, an oil crisis, double digit inflation, various wars, terrorist attacks and a global crisis, the whole thing. Yet one thing that was definite in an uncertain world was that each you held onto Coca-Cola stock you would get more money sent to you. There's something to be said for profitable companies continuously paying you more in good times or bad.
With that insight in mind, it seems that it's all but accepted that KO will continue this half a century streak of dividends increases. Of course "by how much?" is the $100 question (or $1,000 question depending on how many shares you own) but it is clear that looking at last year's payout doesn't necessarily tell you that much about this year's income. Granted people could stop drinking Coca-Cola or the company could face an unexpected massive expenditure - but I wouldn't hesitate in suggesting that there's a better than average shot at KO raising its dividend this February. To get an idea of the possible magnitude of this increase, let's look at KO's performance table from F.A.S.T. Graphs:
Here we see that Coca-Cola increased its dividend by a bit over 9% a year on average. Additionally, over this two decade period the lowest amount that KO increased its dividend was by 6% back in 2000 and 2001. Assuredly past performance does not indicate future results, but it seems that a 6% dividend increase this year isn't out of the question. If we take the current $1.12 annual dividend and increase it by 6% this equates to a yearly payout of $1.1872 and a yield of 3%. When Coca-Cola pays a dividend this April it is much more likely that it pays near 30 cents a quarter rather than its currently quoted 28 cents. Yet for some reason most investors tend to focus on "current" yields rather than expected yields. Ironically - given a slight price increase before the dividend payout - it's conceivable that one could never buy KO with a 3% "current" yield and yet still receive that much on their immediate cost.
And of course, this logic doesn't just hold for Coca-Cola. If you look at Genuine Parts (GPC), for instance, it has a "current" yield of 2.5% but it is overwhelmingly likely that an investor today would receive more than that on their relative cost. Or Kimberly-Clark (KMB) "currently" yields about 3%, but that certainly doesn't account for the likely 42nd year dividend increase to take place this year.
In effect I'm suggesting that in looking at "current" yields one isn't so much looking at in progress data as they might be viewing a "trailing twelve month" yield. Yet why does of this matter? After all with a $1,000 investment we're talking a $2 difference between a 2.8% and 3% yield - even on a $10,000 investment, this represents only a nickel a day. In short, this separate line of thinking is important for three reasons: timing, time and expectations. Further, all three of these components are a derivative of the idea that an investor is making a long-term partnership decision.
The first reason why you should care about expected yields rather than "current" yields is timing. For instance, if you looked at McDonald's (MCD) and Chevron (CVX) you would find respective yields of about 3.4% and just under that - call it 3.37% for Chevron. In turn, if you believed that these two companies have perfectly similar dividend growth prospects, you might feel that MCD is offering a slightly better deal. However, that doesn't take in account the idea that Chevron is likely to increase its dividend this June while McDonald's probably won't increase their payout until December. In turn, even though CVX might have a slightly lower stated yield, it's pretty rational to expect more income this year from CVX rather than MCD. Moreover, if your expectations for the dividend growth records are precisely the same, the "current" yields would probably give you the precise opposite indication of which would pay more in income.
The second folly that comes from observing current yields is the idea that an investor should focus on the long-term expectations of a partnership and not just what happens in a given year. One isn't just looking at his or her expected income for the next quarter or year. Instead, most are focused on what will happen in the coming decades. For instance, Wal-Mart (WMT) "presently" yields 2.5% and Vectren Corp. (VVC) yields closer to 3.9%. In viewing these metrics, it appears that VVC is the clear income winner. However, this doesn't take into account the idea that WMT has the ability to increase its dividend substantially faster than VVC. In 10 years it's not unreasonable to suggest that WMT might be paying more on equal investments made today.
Finally, a third item that should be considered in looking beyond "current" yields is the idea that different companies have different future income prospects. For instance, if you look at Hawaiian Electric's (HE) "current" yield of 4.7% you might also notice that the company has kept its dividend payout frozen at an annual rate of $1.24 per share since the late 1990s. Obviously any yield that is growing will eventually oust this return if it stays stagnant, but even slow growers like Consolidated Edison (ED) have a leg-up. Consolidated Edison has averaged a dividend growth rate of less than 1% a year for the last decade, yet also yields 4.7%. In this way, if these patterns persist, ED would provide more income despite its slow growing nature and same "current" yields.
The overall point is this: "current" yields look like an easy and straightforward comparison metric, but in reality you have to look a bit deeper. In practice, an investor should look at both the expected payouts over a given time period and their relative confidence related to those outcomes. The difference between 2.8% and 3% - as I predict is close to the disparity between what KO will pay on today's investment in the coming year and what websites will state - appears small in the short term. Yet rest assured small amounts aggregate to large payouts over time. In evaluating a partnership position with an income providing security, it's paramount to remember that one isn't just buying a quarter or year of future payouts. More realistically, they are purchasing years or decades worth of potential income streams. Although the "current" yield might be nice to observe, I would simply advocate that we consider the forward yield and future income possibilities with equal if not greater vigor.