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The Secret Ingredient Of Dividend Growth Stocks

Nov. 12, 2014 9:31 AM ETGD, JNJ, KO, MCD, PG19 Comments
Dividends4Life profile picture
Dividends4Life
42.96K Followers

Summary

  • Dividend stocks have a secret ingredient that makes them a much more desirable investment.
  • What separates good dividend stocks from bonds, MMAs and CDs is a hidden power not readily recognizable to the uninitiated.
  • One way to compare the earning power of two investments or an investment and a CD is to look at their Yield On Cost over time.

When people learn that I am an income investor it is not uncommon for them to ask why I invest in stocks instead of other "safer" alternatives such as bonds, high yield money market accounts [MMA] or certificates of deposits [CD]. I generally start with my short answer of, "Dividend stocks have a secret ingredient that makes them a much more desirable investment."

Needless to say this usually piques their interest and normally the response is something like, "Secret ingredient? What secret ingredient?" Then I explain.

Dividend Stocks Hidden Power

Let's assume you can find a CD that earns a similar rate as the dividend stock (a stretch now days, but stay with me) and it is federally insured, thus protecting the purchaser from loss. So it must be better, right?

What separates good dividend stocks from bonds, MMAs and CDs is a hidden power not readily recognizable to the uninitiated - dividend growth. While a CD will pay a market interest rate for its term, its only growth is movement in the market rate at renewal, which can go either up or down. Contrast that with a good dividend stock with decades of consecutive annual dividend increases.

Dividend Stocks Yield On Cost

One way to compare the earning power of two investments or an investment and a CD is to look at their Yield On Cost [YOC] over time. YOC is a simple concept where you divide annual earnings over the investment's original cost. Consider this simple example of a stock with a 2.75% yield and a dividend growth rate of 7%, compared a 5-year CD paying 3.00%, where earnings in both are withdrawn when paid:

Div. Stock CD
Investment $ 10,000 10,000
Initial Yield 2.75% 3.00%
Div. Growth 7.0% 0.0%
Earnings Yr. 1 275

This article was written by

Dividends4Life profile picture
42.96K Followers
My entire career has been spent in industry within the finance and accounting realm. My career started in 1985 and has included exposure to implementing SFASs

Analyst’s Disclosure: The author is long GD, JNJ, KO, MCD, PG. See a list of all my dividend growth holdings here. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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Related Stocks

SymbolLast Price% Chg
GD--
General Dynamics Corporation
JNJ--
Johnson & Johnson
KO--
The Coca-Cola Company
MCD--
McDonald's Corporation
PG--
The Procter & Gamble Company

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