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Dividend growth investing, retirement
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Some of you are familiar with the 10 x 10 concept. It is a table that answers the question, “What beginning yield and what dividend growth rate do I need to achieve a 10% yield on cost within 10 years?” A recent article on it can be found here: “10 by 10: The Interaction of Dividend Yield and Growth.” Obviously, various combinations of yield and DGR can achieve the 10 x 10 goal. The table lets you select a dividend and a growth rate. Where they intersect, it tells you the year in which they will achieve a 10% yield on cost.

In my annual Top 40 Dividend Growth Stocks study, I have in the past used separate scales to score dividend yields and growth rates. Assigning points to those two factors is part of an overall stock-rating system designed for the dividend-growth strategy. Points are awarded in a variety of categories, including ROE, EPS growth, revenue growth, the stock’s Story, and the like. Even the very best stocks rarely approach the maximum possible score. I’ve never found a perfect company and don’t ever expect to.

In preparing 2012’s eBook, it occurred to me that the 10 x 10 table might be modified to create a convenient way to award points for dividend yields and growth rates at a glance. Here’s what I did: I took the 10 x 10 table and subtracted the number of years in each cell from 21. In order to maintain the proportion that I want these two factors to have in relation to the total scoring system, they must have a maximum of 20 points for the two factors combined. So subtracting the number of years in the original table from 21 gives me a score for each combination of yield and growth rate, with a minimum of 0 and a maximum of 20.

Two simple but extreme examples illustrate the concept. If a dividend stock yields 10% on the day you buy it, obviously it takes no time to achieve a yield on cost of 10%. So the number of years in the original 10 x 10 table would be 1, and its score would be 20. On the other hand, if a dividend stock has a yield of 1% when you buy it and a DGR of 5% per year, it would take 47 years to reach a 10% yield on cost. That would score -27, which is effectively 0 (or, “you can’t get there from here”). Instead of 0 I use X in the following table, meaning that the stock is eliminated from further consideration.

Here’s the table:

10 by 10 Dividend Growth Stock Scoring Table

Initial Yield

Annual Growth

Rate

3%

4%

5%

6%

7%

8%

9%

10%

4%

X

X

4

9

13

16

19

20

5%

X

3

7

11

13

17

19

20

6%

2

6

9

13

15

18

20

20

7%

4

8

11

14

16

18

20

20

8%

6

9

12

15

17

18

20

20

9%

6

10

13

15

17

19

20

20

10%

8

11

14

16

17

19

20

20

11%

9

12

14

16

18

19

20

20

12%

10

13

15

16

18

19

20

20

13%

11

13

15

17

18

19

20

20

14%

12

14

16

17

18

19

20

20

15%

12

14

16

17

18

19

20

20

20%

14

16

17

18

19

20

20

20

Notes on use:

  1. All numbers have been rounded. Only whole points are awarded.
  2. You have a choice as to what DGR to use. In the past, I have used the 5-year DGR. This time, I am considering using the lowest of the 1, 3, 5, and 10-year DGRs to make things more conservative.
  3. On the other hand, the initial yield on the day you buy a stock is known precisely.
  4. I have always required a minimum initial yield for eligibility: 3.0% for most stocks. This coming year, I will probably bump that up to 3.25%. Each individual investor can select his or her own minimum initial yield. Some frequent contributors around here use minimums as low as 2.0%, while others require 4.0% or 5.0%.
  5. Similarly, individuals may require minimum DGRs, such as 5% or 8% annualized growth per year.
  6. I consider stocks with 9% or 10% yields to have a red flag, because those yields are unusually high in the world of dividend-growth stocks. They require intense scrutiny regarding sustainability.
  7. The table is based on a goal of 10% yield on cost within 10 years. You may have different goals. For example, some dividend-growth investors would like to reach 10% yield on cost within 7 years, or 12% within 10 years. It would be easy enough to create a corresponding “10 x 7” or “12 x 10” table as a starting point. The fundamental ideas behind the table do not change.

The main value of the table, besides sliding nicely into my own scoring system, is to provide a quick way to compare say, PepsiCo (NYSE:PEP) with a current yield of 3.3% and 5-year DGR of 14% to Mercury General (NYSE:MCY) with an initial yield of 5.6% and a 5-year DGR of 6.6%. From the table above, PEP would score 14 points while MCY would also score 14 points despite its much higher initial yield. Other factors, of course, might overwhelm these two considerations in arriving at a final score.

It is unfortunate that dividend-growth investors have in some corners been labeled as interested only in yields and historical growth rates while being blind to other factors that go into complete stock analysis and due diligence. So let me emphasize that while this table is focused on those two factors, there are many other elements involved in evaluating dividend-growth stocks. The table is only one element in creating a complete analytical picture. I use about 20 factors to rate each company and then another 9 to value each candidate.

The dividend-growth strategy is about much more than yields and growth rates. It’s not brain surgery, but when done right it is a thorough process. So the usual boilerplate applies: Do your own due diligence before investing in anything.

Disclosure: I am long PEP.

Source: Using The 10 x 10 Table To 'Score' Dividend Yields And Growth Rates