The stock market continues to rally, which is lowering dividend yields and making it harder to find good value. But there are still stocks out there that sport not only a solid dividend yield, but a history of consistent dividend growth over time.
One such company is Abbott Labs (NYSE:ABT). With a dividend yield of 3.4% and a history of increasing dividends over time, Abbott Labs is one of my favorite dividend paying stocks.
Abbott Laboratories engages in the discovery, development, manufacture, and sale of health care products worldwide. The company offers adult and pediatric pharmaceuticals for rheumatoid and psoriatic arthritis, ankylosing spondylitis, psoriasis, juvenile idiopathic arthritis, and Crohn's disease; dyslipidemia; HIV infection; prostate cancer, endometriosis and central precocious puberty, and anemia caused by uterine fibroids; respiratory syncytial virus; adult males who have low testosterone; secondary hyperparathyroidism; hypothyroidism; and pancreatic exocrine insufficiency, as well as anesthesia products.
*Profile taken from Yahoo Finance.
1 Yr Div
Annualized 5 Yr Div
Last Year in Which
Abbott Labs has a solid dividend yield of 3.4% and has a solid history of growing dividends over time. They have never failed to increase their dividends in any year since starting their dividend payments in 1983. The one year dividend growth rate is fairly strong at 9.1% while the five year dividend growth rate is more impressive, coming in at 14.9%. They payout ratio of 62% is higher than I normally like, but it is still reasonable and allows them to increase dividends even if earnings don't budge, at least for a few years.
It is not necessarily obvious how investors will fare if they hold onto Abbott Labs for the next 10 years, receiving not only the dividend, but a growing dividend over time. It's important to analyze scenarios for such a company where we look at the dividend yield and growing dividends. I ran the following scenario on our publicly available calculator called Total Returns- Dividends Vs. Price Appreciation. If we buy 1,000 shares today, apply a dividend growth rate of 6% over the next 10 years, reinvest dividends, and assume the price of the stock does not change, we get the following:
The annual return in this case is 4.4%. I've also included the future value of the dividend income stream compared to the future value of the initial investment. The dividends accumulated to more than $29,000 over the 10 year period. Looked at another way, the price of this stock could fall by almost 45% during this period and the investor would still break even. Now let's take a look at what happens over 20 years:
The annual return jumps to 5.4% even with no growth in the stock price. Also notice that the total dollar value of the dividend payments is nearly 100% higher than the value of the initial investment. That is the beauty of high dividend paying stocks over time. The initial investment becomes less and less important.
Dividend paying stocks can also help a retirement plan immensely, especially vs. low-yielding treasury bonds. I plugged in the 4.4% total return figure for a portfolio into our retirement planner in place of the treasury bonds that were there before.
I found that if a typical 55 year old couple with $400,000 in assets moves 50% of their funds from treasuries to dividend payers that give them a 4.4% return, over ten years they will have increased the time that their funds last in retirement by ten years.
Scenarios such as the ones I've run here can help investors understand the power of dividends over time, especially when those dividends are growing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.