10-Year Dividend Payback For Top S&P 500 Dividend Aristocrats

 |  Includes: ABT, CINF, CLX, HCP, JNJ, KMB, LEG, MCY, PBI, T, VVC
by: Richard Shaw

There are many ways to inspect the yield opportunity with dividend stocks. One approach is to make projections of dividends over a number of years to see how much of the current purchase price might be recovered in the form of dividends.

This article looks at the S&P 500 Dividend Aristocrats in that light, and identifies the 12 constituents that appear to have the greatest potential for cost recovery through dividends. The data is a partial extract from a larger internal report we produced in January.

Click image to enlarge
Click to enlarge

The data table image presents those 12 stocks:

  • PBI - Pitney Bowes
  • T - AT&T
  • LEG - Leggett & Platt
  • MCY - Mercury General
  • CLX - Clorox
  • CINF - Cincinnati Financial
  • ABT - Abbott Labs
  • KMB - Kimberly Clark
  • JNJ - Johnson & Johnson
  • WAG - Walgreen
  • VVC - Vectren
  • HCP - HCP

Important Note: Let's be clear, that we are not recommending purchase of any stocks in this article. Our purpose is merely to present a method of analysis that investors may wish to incorporate in their overall analytic approach to dividend stocks. There is certainly more to consider than this calculation in any decision.

The method is simple to describe, and depending on how fancy you want to be, it can be simple or complex.

The basics are to know the current dividend, make a rational judgment of some sort about the growth rate of the dividend over some period of years, then project the dividends year-by-year at that rate and add them up; then divide the sum by the current stock price. That will give you some idea of how much of your purchase costs might be recovered by dividends over the holding period.

Of course, there is always the question of what the terminal stock price might be, but we would argue that if the dividend is attractive now and the long-term growth rate is truly rational, the stock price has a pretty good chance of being greater than the purchase cost after a long-period, such as 10 years. However, that is a separate evaluation you have to make. This particular method only goes so far as to consider cost recovery through dividends.

The specifics we used in this example were as follows:

  1. Calculate the average of the historical dividend growth rates for one year, three years and five years
  2. Set a maximum growth rate for the dividend in the second through fifth year at the lesser of the average or some cap (we used 18% in this example)
  3. Set a maximum growth rate for the dividend in the sixth through 10th year at the lesser of the average or some cap (we used 12% in this example)
  4. Grow and sum the dividends at the selected rates for one year
  5. Divide the sum of the projected dividends by the purchase cost (the current price)
  6. Repeat the process using the lesser of the minimum historical growth rate among the one year, three year and five year rates.

The outcome of this exercise (based on 12/30/2011 data) was that an equal weighted portfolio of the stock holdings of the S&P 500 Dividend Aristocrats might recover about 36% to 40% of cost over 10 years.

That beats the heck out of 10-year Treasuries at today's rates, but is in the ballpark for what 10-year Treasuries might be expected in a more normal interest rate environment - meaning the excess return over Treasuries would have to come from price appreciation.

The top stocks in the list (based solely on this calculation and none other - but you need to consider other things), have a projected dividend cost recovery ranging from about 42% to 82%.

This approach just adds a data point to the overall picture of a stock, but one that may be useful to those who place high priority on yield, and who are concerned about bond/stock comparisons.

Disclosure: QVM has positions ABT, JNJ and T in some accounts as of the creation date of this article (March 1, 2012).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.