Tim McAleenan wrote a fantastic article on the wonders of dividend investing using Procter & Gamble (PG) as an example. I suggest you read it. The gist: Those who bought Procter in 1991 became rich on a stream of rising dividends and share appreciation.
In 1991, shares of Procter & Gamble traded for an average of $7.21 per share on a split-adjusted basis. Since 1992, P&G has paid out a total of $17.92 in dividends cumulatively, plus the one-time stock spin-off of the Jif/Crisco units. At Friday's market close, Procter & Gamble was selling for $65.81 per share...
One reader asked a marvelous question:
Robert Albers: "So how do you pick the next PG? How do you find companies like PG? Do you just hear about them? Not every company on various lists are like PG, so how do you pick them out? Are there several dozen like PG, and what is the trick to identifying them."
Great question. After all, you can't go back to 1992 for your stock purchases. Only in your dreams, can you find that time portal that allows a return to 1992 to pick up some Altria (MO) (then called Philip Morris) and maybe Procter, and then, make your way back with fistfuls of dividends.
I bought Procter back in the late 1980s and still hold it. It was a great purchase. I wish I could say it was genius, but I was young and not a particularly astute investor. The buy was more luck than anything else. And, you better believe that I do wish I could find that time portal and buy much more.
The only way to find the next Procter is to learn what made Procter Procter.
Procter back then had more going for it than the Procter of today: more "drive" to its earnings and revenue and a much smaller payout rate.
The Procter of 1991 had better revenue and earnings growth than it does today. Its payout ratio was lower, leaving more room for dividend increases. Moreover, its dividend yield was less (about 2.2%). Yet, there was already a dividend culture in the company: the company had been giving its investors dividends for six years.
While Procter is still a great company, it has lost some of the characteristics that made it one of the great dividend plays of the last 20 years. It's "matured," a company possessing quieter revenue and earnings growth. The company "recognizes" the change: It's handing a higher portion of its profits to investors, hence the higher payout ratio. It would be highly unlikely to give shareholders the startling returns of Procter circa 1992.
The "ideal" dividend stock to search for (using Procter's lessons) possesses:
- Revenue Growth
- Earnings Growth
- Low Payout Ratio
- Commitment To Dividend
How do you find the next Procter? You look for companies demonstrating those four traits.
Disclosure: I am long PG.