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Long-term horizon, dividend investing, dividend growth investing
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I am 55 years old. I hope to retire someday (soon). I would love to be able to fund my retirement expenses from income, rather than from selling assets, so I don't have to worry about selling into a down market.

I choose dividend growth investing to achieve my goal. Dividend growth investing means "growth of the dividend," which leads to rising income, which counteracts the erosion of purchasing power caused by inflation.

My specific goal is to achieve 10% yield on cost within 10 years. I was highly influenced by David Van Knapp's articles on how to achieve that goal:

  • "10 by 10: A New Way to Look at Dividend Yield and Growth" here
  • "10 by 10: The Interaction of Dividend Yield and Growth" here
  • "Using The 10 x 10 Table To 'Score' Dividend Yields And Growth Rates" here

How do I start?

David's articles show that I can achieve my goal if I choose a company which has any one of the following combinations of dividend yield at a purchase and dividend growth rate for the 10 years following purchase:

Dividend Yield At Purchase

Dividend Growth Rate [add: per Year]

7%

4%

6%

5%

5%

7%

4%

10%

3%

13%

The way I used to look at it, I would purchase companies whose yield at purchase was between 3% and 7%, and hope they will grow their dividends at rates of 4 to 13%.

Yesterday I realized I was doing it backwards.

I should instead choose companies that will grow their dividends at rates of 4% to 13%, and hope to purchase them when their yield at purchase is the amount shown in the table above:

Dividend Growth Rate [add; per Year]

Dividend Yield At Purchase

4%

7%

5%

6%

7%

5%

10%

4%

13%

3%

I like to think I'm smart, but I'm definitely not smart enough to choose companies that will grow dividends at a particular rate over the next 10 years. So I turn to the way I bet at the racetrack. I don't bet on which horse will win. I bet on which horse has a history of winning.

I found 80 companies in David Fish's lists of Dividend Champions, Contenders and Challengers (available for free here) that have grown their dividends at the growth rates listed above for the past 10 years (or more). Here is a subset, for illustration:

Company Name

Company Ticker

Dividend Growth Rate [add: per Year]

SYSCO CORP

SYY

4.0%

MCCORMICK & CO

MKC

5.0%

AQUA AMERICA INC

WTR

6.0%

APTARGROUP INC

ATR

7.1%

RAVEN INDUSTRIES INC

RAVN

8.0%

CARDINAL HEALTH INC

CAH

9.1%

FASTENAL CO

FAST

10.0%

FACTSET RESEARCH SYSTEMS INC

FDS

11.1%

NOVO-NORDISK A/S-SPONS ADR

NVO

12.1%

TEVA PHARMACEUTICAL-SP ADR

TEVA

16.2%

Now that I know which companies to buy. The second question is, when do I buy them? How do I achieve the desired dividend yield at purchase?

Take SYY. Its current dividend is $1.08 per share (according to Yahoo Finance). Because its dividend growth rate has been (and I hope continues to be no less than) 4% per year, its dividend yield at purchase must be 7% (or more), which corresponds to a price at purchase of $15.43 (or less) per share.

Now I know which companies to buy, and when to buy them, in order to achieve my goal of 10% yield-on-cost in 10 years.

Now for the bad news. SYY's price (as of 2/15/2012, when this article was written) is $29.24, which is higher than $15.43, which means I cannot buy SYY today and achieve 10% yield-on-cost in 10 years (unless its dividend growth rate rises to much more than 4%).

What about the other 79 companies?

Now for the really bad news. Only one out of 80 can be purchased at current prices and current dividend growth rates in order to achieve 10% yield-on-cost in 10 years. The rest are simply too expensive at current prices.

I know what I have to do, thanks to David Crosetti's article "Dividend Growth Investing: Waiting For The Ball To Come To Me" (here). I must wait for prices to fall. I must wait for the ball to come to me.

How long must I wait? It depends on the company. The "Biggest Loser" in percentage terms is Roper Industries (NYSE:ROP), which needs to lose 90.24% of its current price. The "Biggest Loser" in absolute terms is IBM (NYSE:IBM), which needs to lose $142.53 per share.

The only company I can buy today that meets my criteria is Vector Group Ltd (NYSE:VGR). Others that are close are Unisource Energy Corp (NYSE:UNS) (needs to lose 25.8%), Owens & Minor (NYSE:OMI) (needs to lose 26.7%), Avon Products (NYSE:AVP) (needs to lose 27.3%) (but they just announced a dividend freeze, so they will no longer be in the CCC lists), and Enterprise Products Partners (NYSE:EPD) (needs to lose 30.3%).

Please remember that this is only the beginning of the investment selection process. Many investors look at many other factors, such as Tweed Factor (from Norman Tweed), Confidence Factor (from David Fish), valuation via Fast Graphs (from Chuck Carnevale), etc. Do your own due diligence before you invest.

A spreadsheet of the 80 companies mentioned above is available here. That file is a free download, and can be sorted any way you wish. All data contained therein were accurate as of 2/15/2012.

That spreadsheet is part of my dividend web site here. The site is free, and lists many useful statistics about dividend growth companies, including their dividend histories.

Source: A Backward Way To Achieve 10% Yield On Cost In 10 Years