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With the recent news that Wal-Mart (NYSE:WMT) is being investigated for allegedly paying bribes to Mexican officials, their stock price is down nearly 7%. One positive for those looking to invest in Wal-Mart is that the price drop has driven their dividend yield up from 2.5% to 2.7%. This is a good time to take a look at the potential future for Wal-Mart dividends and how investors might fare over the long run if they collect a growing dividend over time.

WMT Profile*:

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam's Clubs, and neighborhood markets, as well as walmart.com; and samsclub.com.

*Profile taken from Yahoo Finance.

WMT:

Div Yield

1 Yr Div
Growth Rate

Annualized 5 Yr Div
Growth Rate

2.7%

9%

16%

Payout Ratio

Last Year Dividend Was Cut

32%

Never (Paying since 1972)

Stepping away from the short-term bad news for Wal-Mart we can see that their dividend growth has been stellar. Their average five year annual growth rate has been running at 16%. They have a very low payout ratio of 32%, which means they can weather serious economic downturns or earnings hits and still maintain their dividend. Lastly, they have never cut their dividend since beginning payments in 1972.

It is not necessarily obvious how investors will fare if they hold onto WMT for the next 10 years. It's important to analyze scenarios for such a company where we look at both the dividend yield and growing dividends. I ran the following scenario on our publicly available calculator called Total Returns- Dividends Vs. Price Appreciation. If we buy 1,000 shares today, apply a dividend growth rate of 10% over the next 10 years, reinvest dividends, and assume the price of the stock does not change, we get the following:

Inputs:

Investment

Dividend Yield

Growth of
Dividend (Annual
)

$58,000

2.7%

10%

Outputs:

Total Return

Annual Return

FV Dividends

FV Investment

50%

4.1%

$28,803

$58,000


(Click to enlarge)

What if an investor holds Wal-Mart for 20 years in a retirement portfolio and collects the dividends over this time frame without any increase in the stock price?

Outputs:

Total Return

Annual Return

FV Dividends

FV Investment

218%

6%

$126,319

$58,000

An annual return of 6% with no increase in the stock price is not too bad. It simply shows the power of growing dividends over time.

Dividend growth stocks can help a retirement plan immensely, especially vs. low-yielding treasury bonds. I plugged in the 4.1% total return figure I found in our first example into our retirement planner in place of the ten treasury bonds that were in the portfolio before.

I found that if a typical 55 year old couple with $400,000 in assets moves 50% of their funds from treasuries to dividend payers that give them a 4.1% return, over ten years they will have increased the time that their funds last in retirement by over ten years.

I believe that investing in Wal-Mart today for the long run will pay off due to their growing dividends. Those of us invested in dividend growth stocks for the long run do not worry too much about short-term issues like the bribery scandal Wal-Mart is wrapped up in today.

Scenarios such as the ones I've run here can help investors understand the power of dividends over time, especially when those dividends are growing.

Source: Wal-Mart: Dividends Are More Important Than Short-Term Bad News