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:
EPS growth past 5 years
EPS growth next 5 years
ConAgra Foods, Inc.
Lockheed Martin Corporation
ONEOK Partners, L.P.
Public Service Enterprise Group
Rogers Communications Inc.
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:
Return on Equity
Processed & Packaged Goods
Aerospace/Defense Products & Services
Oil & Gas Pipelines
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.)
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.