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Part of the allure of dividend-paying stocks is that they pay back your initial investment directly. Are any of the stocks in the consumer goods sector attractive to income investors who wish to be paid back without having to sell their shares in the secondary market?

Calculating Payback Periods

The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out later in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making earlier distributions worth more.)

Since many dividend investors are attracted to high-paying dividend companies on the premise that they can ignore what the markets do and simply focus on their dividend income, the payback period provides a reality-check for how long payback based on dividend payments could take.

Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and dividend yield was projected by taking the minimum of the following:

  • Earnings growth over the past five years
  • Analyst estimates for earnings growth for the next five years
  • Return on equity times the earnings reinvestment rate

The minimum of these measures was then used to estimate dividend growth for the next three years.

Consumer goods stocks were screened for dividend payback within two decades, dividend yields in excess of the 10-year Treasury yield, and payout ratios below 60%. The values of these inputs are provided below:

Ticker

Company

Dividend Yield

Payout Ratio

EPS growth past 5 years

EPS growth next 5 years

AVP

Avon Products Inc.

5.2%

53.3%

-5.5%

10.0%

CAG

ConAgra Foods, Inc.

3.6%

52.1%

16.4%

7.3%

CPB

Campbell Soup Co.

3.7%

48.7%

6.8%

5.1%

CRWS

Crown Crafts Inc.

4.1%

26.1%

4.4%

14.0%

OTC:DEER

Deer Consumer Products, Inc.

4.2%

13.5%

88.5%

20.0%

HAS

Hasbro Inc.

3.9%

38.6%

20.3%

9.5%

MAT

Mattel Inc.

3.9%

41.7%

7.3%

9.1%

PM

Philip Morris International, Inc.

3.8%

56.9%

8.1%

11.4%

SR

The Standard Register Company

9.7%

47.5%

-24.1%

7.5%

UN

Unilever NV

3.7%

29.7%

4.9%

7.7%

Abnormal growth will not last forever, and analyst estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)

Many consumer goods sector stocks have distribution rates which are high enough that the sum of future dividends would equal your initial investment inside of two decades:

Ticker

Industry

P/E

P/B

Return on Equity

Payback Period (years)

AVP

Personal Products

10.5

4.2

44.1%

19

CAG

Processed & Packaged Goods

14.7

2.4

15.4%

19

CPB

Processed & Packaged Goods

13.1

8.7

69.2%

19

CRWS

Textile - Apparel Clothing

9.5

1.2

13.2%

18

DEER

Home Furnishings & Fixtures

4.3

0.9

24.7%

13

HAS

Toys & Games

12.7

3.5

27.9%

17

MAT

Toys & Games

15.1

4.2

28.8%

18

PM

Cigarettes

17.0

65.9

252.5%

18

SR

Office Supplies

5.9

1.2

20.6%

19

UN

Processed & Packaged Goods

17.4

5.0

29.6%

19

Conclusion

If you want to ignore what prices your securities fetch in the markets, you will be waiting a long time to get paid back. Since all the dividend consumer goods stocks would require more than a decade for payback, investors should rethink a singular focus on dividends before investing in the consumer goods sector.

What can dividend investors do with these stocks? Since they cannot "buy, forget, and cash the check" they must consider total return including capital appreciation. Many of these stocks offer compelling low price-multiples, which are promising for future stock prices. CWRS, DEER, and SR are particularly compelling on the basis of valuation.

Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

Source: Payback Periods Of 10 Consumer Goods Dividend Stocks