When a celebrity is involved in a scandal of some sort, there is an old go-to trick that is often used by the PR handlers of the scandalous celeb. Right after the scandal occurs, the PR handlers will immediately say, "Reserve judgment. Wait until all of the facts are out." And then they repeat that for months on end. And then, once all of the facts are out, the PR handlers say, "That's old news. Don't you have anything else to talk about?" It's a great tactic used to avoid talking about what really happened.
Similarly, when we talk about the long-term dividend performance of a given stock, stepping back to take a look at the yield on initial investment can be a rewarding endeavor to gauge what is "really happening." I think that the yield on initial investment metric can be particularly helpful when looking at dividend growth companies that offer low yields yet have long records of high annual dividend growth.
For example, let's take a look at Becton Dickinson (NYSE:BDX). In 2002, you could have purchased 200 shares of Becton Dickinson for $6,000 at $30 per share (that's about the median price the company traded at during the year). In 2002, Becton paid out $0.39 in annual dividends. That would have given you $78 in annual dividends, for a paltry dividend yield of 1.3%. At first glance, the low yield would indicate that this is not the kind of company that income-focused investors should fall in love with. But what has happened over the ten years since then? Becton has raised its dividend by 15% annually, and Value Line estimates that Becton will pay out $1.80 over the course of 2012. If you didn't reinvest your dividends along the way, you would now be generating $360 in annual dividends relative to your initial investment. Within ten years, you were able to make your $6,000 initial outlay turn a 1.3% into a 6.0% yield. That's a heck of an improvement.
And yes, there is something you can learn from this evaluation. Maybe Becton Dickinson is a company that you wouldn't have considered in 2002 because of its 1.3% yield, and maybe it's a company that you wouldn't consider today because of its still low 2.3% yield. But taking a look at the yield on initial investment can help give you a clear-eyed view of what double digit growth rates can mean for a given holding in your portfolio. While everyone has "Past performance does not guarantee future success" drilled into their heads, it's easy to overlook the actual performance of these high dividend growers over time, and yield on initial dividend investment is a good way to step back and say, "Let's take a look at what's been happening here."
Some people are quick to dismiss metrics like current yield on initial investment as the mark of unsophisticated Neanderthals who grow too attached to their investments. Sometimes, a focus on initial yield on investment can become associated with reckless sentimentalism and "falling in love with stocks." But I don't see it that way at all. It's a great tool to have in your arsenal to measure how dividend growth rates are actually affecting your portfolio. There are some companies out there in addition to Becton Dickinson, IBM and Wal-Mart (NYSE:WMT) immediately come to mind, which have long records of high dividend growth, yet often fall off the radar of dividend growth investors because they come with a low initial yield. But if you measure the yield on initial investment of these companies over long periods of time (say, ten years or so), then it's a great way to introduce these potentially lucrative dividend growth investments into a conversation they're typically left out of.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.