The next part of this dividend growth extrapolation series pits two of the most popular packaged and processed food stocks Kellogg (K) and General Mills (GIS). Let us take a look at the dividend basics of these two stocks:
- Both stocks yield almost the same: K's current yield is a tad higher at 3.4%, compared to GIS' 3.2%.
- Surprisingly, the payout ratio is very similar as well: K's is 50%, while GIS's is 52%. The numbers aren't too high to be alarmed about.
- K's average dividend increase over the past 5 years has been 8.13 %, while GIS' last 5 increases (not strictly 5 years in this case) have an average of 8.97%. Again very similar numbers.
As in the earlier exercises let us take a look at the expected returns for an investor who can set aside his/her money in these two stocks for a 10 year period.
- Assume you purchase 1000 shares of K at the recent price level of $50 for a total initial investment of $50,000.
- The current yield works out to 3.4% as shown in the table below.
- The table assumes Kellogg maintains its 5 year average dividend increase of 8.13%.
- Notice how the dividend payments and the yield on original cost more than double in 10 years, leading to about $4000 in annual dividends.
- We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
- Capital gains haven't contributed much for Kellogg investors as the stock has been pretty much trading in the $40s and $50s for the past 5 years at least.
- Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
- 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.
- A similar exercise on General Mills is presented in the second table shown below, at an average dividend increase rate of 8.97% per year.
Our Take: We performed this exercise to see which of these two stocks would make the best fit into our portfolio from a dividend and dividend growth perspective. And as this experiment has shown, there is very little to separate the two companies in the dividend and dividend growth categories. However, looking at the past 5 year stock price, General Mills has lost more ground while Kellogg has at least managed to hold the same trading range. Investors who have been in these two stocks for a long time, please feel free to voice your opinion on why you own one or both of these stocks.