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In the U.S. stock market, 10 stocks were found to have dividend payback periods under 15 years. Unfortunately, buyers of these stocks would have to wait at least 11 years for the dividends of any of these stocks to pay back their initial investment. The fastest paybacks are not fast enough to ignore capital appreciation when judging stock investments.

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.)

Dividend yielding 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

APL

Atlas Pipeline Partners LP

5.9%

7.2%

9.7%

10.0%

ARLP

Alliance Resource Partners LP

5.7%

44.5%

15.4%

10.7%

DDIC

DDI Corp.

4.3%

48.4%

66.8%

15.0%

GAIN

Gladstone Investment Corporation

7.7%

48.7%

-4.6%

7.0%

INTX

Intersections Inc.

6.0%

55.4%

2.9%

10.0%

KED

Kayne Anderson Energy Development

6.6%

35.6%

15.3%

3.0%

PSE

Pioneer Southwest Energy Partners

7.3%

54.9%

9.7%

6.3%

QCCO

QC Holdings, Inc.

5.3%

31.4%

6.2%

18.0%

UNTD

United Online, Inc.

7.7%

53.7%

-4.7%

15.0%

WSTG

Wayside Technology Group, Inc.

5.0%

54.4%

10.7%

22.0%

Ten stocks have distribution rates which are high enough that the sum of future dividends would equal your initial investment inside of fifteen years:

Ticker

Industry

P/E

P/B

Return on Equity

Payback Period (Years)

APL

Oil & Gas Pipelines

7.34

1.54

23.5%

12

ARLP

Industrial Metals & Minerals

8.47

4.07

36.4%

12

DDIC

Printed Circuit Boards

10.75

2.25

23.1%

15

GAIN

Diversified Investments

6.85

0.82

12.3%

14

INTX

Consumer Services

12.39

2.16

18.7%

14

KED

Asset Management

6.17

1.03

17.7%

13

PSE

Oil & Gas Drilling & Exploration

7.45

4.05

67.7%

11

QCCO

Savings & Loans

5.95

0.8

14.4%

14

UNTD

Specialty Retail, Other

8.68

0.98

11.5%

14

WSTG

Computers Wholesale

10.58

2.06

19.9%

14

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 these dividend 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: The 10 Quickest Dividend Paybacks