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Investors often characterize large caps as mature, dividend-paying behemoths and smaller companies as dynamic growth companies which are strapped for cash. This is simply not true: We find that there are only seven large caps which meet screens for payback periods inside of two decades.

Large Cap Payback Period Calculations

The number of years it takes for an investment to pay you back is called the payback period. 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.

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.)

Large caps 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

CA

CA Technologies

3.7%

10.6%

42.6%

9.7%

CAG

ConAgra Foods, Inc.

3.6%

52.1%

16.4%

7.3%

LMT

Lockheed Martin Corporation

4.5%

41.2%

6.3%

8.4%

OKS

ONEOK Partners, L.P.

4.1%

55.9%

3.7%

12.4%

PEG

Public Service Enterprise Group

4.5%

51.8%

12.4%

2.7%

RCI

Rogers Communications Inc.

3.6%

48.5%

30.0%

9.3%

TU

TELUS Corporation

4.1%

58.1%

12.3%

7.1%

Many large cap 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

CA

Application Software

14.79

2.26

16.1%

18

CAG

Processed & Packaged Goods

14.82

2.36

15.4%

19

LMT

Aerospace/Defense Products & Services

11.32

28.39

118.6%

16

OKS

Oil & Gas Pipelines

22.83

3.7

16.8%

19

PEG

Diversified Utilities

11.55

1.52

13.6%

18

RCI

Wireless Communications

13.46

5.35

39.3%

18

TU

Wireless Communications

15.28

2.33

15.1%

17

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.

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 in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making earlier distributions worth more.)

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 large cap stocks would require more than a decade for payback, investors should rethink a singular focus on dividends before investing.

What can dividend investors do with these stocks? Since they cannot "buy, forget, and cash the check" they are stuck considering total return including capital appreciation. Fortunately, many of these stocks offer compelling low price-multiples, which are promising for future stock prices. However, to avoid value traps, investors should weigh how cheaply these dividend-paying stocks are trading against measures of quality. In short, prudent investment for income requires more than reading a stock's yield.

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: 7 Large Caps With Dividend Paybacks In Under 20 Years