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The only stocks I own in my retirement portfolio are those with relatively high dividend yields and a history of consistent dividend growth. I also look for companies that have very low debt/equity, which shows that management is being responsible about growth. Two of my top picks in this regard are Johnson & Johnson and Sysco.

Company

Div Yield

1 Yr Div

Growth

Rate

5 Yr Div

Growth

Rate

Debt/Equity

Last Year in

Which Div Did

Not Increase

Johnson & Johnson (NYSE:JNJ)

3.6%

9.3%

10.6%

30%

1976

Sysco (NYSE:SYY)

3.8%

4.0%

9.3%

57%

Never (Company

went public

in 1987)

It is not easy to find a company that pays out 3.6% in dividends, has a five year dividend growth rate of over 10%, and has increased its dividend every year for over 30 years. But that is just what Johnson & Johnson has accomplished. While Sysco does not have the recent high dividend growth rate of JNJ, they do sport a slightly higher dividend yield and they have never failed to raise their dividend since going public in 1987.

When analyzing dividends, it is always a worthwhile exercise to see how dividends will contribute to total returns over different periods of time with varying degrees of dividend growth. I did so using my dividend calculator called Total Returns- Dividends vs. Price Appreciation. To be realistic, I chose several growth rates that are close to the recent dividend growth rates of the companies in question. Let’s take a look at JNJ first:

JNJ Dividend Scenarios- Annualized Dividend Returns

Div Growth

Rate = 5%

Div Growth

Rate = 7.5%

Div Growth

Rate = 10%

Div Growth

Rate = 12%

Ann Return Due

to Div Over 10 Years

4.4%

4.9%

5.4%

5.9%

Ann Return Due

to Div Over 15 Years

4.9%

5.6%

6.5%

7.3%

Ann Return Due

to Div Over 20 Years

5.3%

6.3%

7.5%

8.6%

*Assumes dividends are reinvested

The matrix above shows that as time goes on, Johnson & Johnson’s stock can deliver solid returns solely due to dividend payments. The key of course is the growing dividend over time. However, even in a pessimistic scenario where the dividend growth rate falls to 5%, less than half of the five year growth rate today, the annualized return due to dividends over 20 years is still a respectable 5.3%.

Sysco’s scenarios are below:

SYY Dividend Scenarios- Annualized Dividend Returns

Div Growth

Rate = 3%

Div Growth

Rate = 5%

Div Growth

Rate = 7%

Div Growth

Rate = 10%

Ann Return Due

to Div Over 10 Years

4.3%

4.7%

5.1%

5.7%

Ann Return Due

to Div Over 15 Years

4.5%

5.1%

5.8%

6.8%

Ann Return Due

to Div Over 20 Years

4.8%

5.5%

6.4%

7.8%

*Assumes dividends are reinvested

Because of SYY’s lower dividend growth rate in the past year, I chose lower growth rate scenarios. Because of this, we do not see returns that are quite as high as JNJ’s. But over 20 years, even in a low growth scenario of 3%, we still get a 4.8% annualized return due to dividends. And if the growth rate picks back up to the five year level, we would see an annual return of 7.8% due to dividends over 20 years.

It’s also a worthwhile exercise to determine when the returns of two stocks will break even. I ran these two stocks vs. each other using today’s dividend yield and the five year dividend growth rate. Although JNJ has a slightly lower yield, its higher growth rate allows the compounded return due to dividends to break even with SYY in year 8. Running the same analysis using the one year dividend growth rate produces a break even in only two years, as shown below.

Using the power of growing dividends over time is one of the best things you can do for your retirement portfolio. But it is important to choose companies that have a solid history of dividend growth and have shown that they are responsible with their levels of debt.

Source: 2 Dividend Stalwarts For Retirement Portfolios