Low, Medium or High Yield: 16 Dividend Growth Stocks for Every Type of Investor

by: David Fish

The Dividend Champions spreadsheet and PDF have been updated through 6/30/11 and are available here. Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years. “CCC” refers to the universe of Champions, Contenders, and Challengers.

Dividend Growth vs. Yield

In a recent article by SA Contributor Low Sweat Investing, the author, who deservedly earned an Editor's Pick and garnered at least 242 comments, discussed the relatively friendly “feud” between “high-yield fans and dividend-growth lovers.” He went on to report some surprising findings that seem to favor the high-yield fans...up to a point.

Comparing a static 6% yield with dividend reinvested to a 3% yielder with a dividend growing at 7.5%, he found that it would take until Year 13 for the latter to catch up in terms of current income and until Year 19 before the dividend growth stock pulls even in terms of cumulative dividends received. Of course, the dividend growth lover often counters that his or her stock is more likely to enjoy capital appreciation, so it would provide better total returns over time.

The high-yield fans can counter that by pointing out that many high-yielders also increase their payouts regularly. I don't intend to settle that debate, which will probably go on as long as there are dividend-paying stocks to enjoy owning.

If anything, I hope to expand on LSI's excellent work by adding a third, and possibly larger, group of dividend growth investors. Of course, I'm talking about those who focus on the middle ground of moderate yield and better-than-average dividend growth, sometimes referred to as the “sweet spot” of the dividend-growth universe.

These investors often target yields of 3-5% and dividend growth rates of 5-10%. (We could also say that there are fourth and fifth groups, being investors who either want no dividends or want yields of 10% or more. But neither of those groups involve dividend growth patterns, so I'll leave them out of this discussion.) What's clear is that the three main groups of dividend-growth investors all have valid claims that their approaches work well over time. And we also should recognize that many investors are successful at using various blends of these approaches.

But Wait, There's More!

One thing that struck me among the many intelligent comments to the aforementioned article was the varying usage of the term “high yield.” Specifically, some commenters were inclined to chide some authors who like to attract readership by using the term in their titles, but include stocks in the articles that yield less than 2%! I'm sure that you've seen these articles, mainly by authors who seem to crank out two or three articles a day, with teasing titles such as “12 High-Yield Stocks Abe Lincoln Would Love” or “18 High Dividend Stocks with Lots of Cash.” (Don't ask me what the term “High Dividend” means; I think it's code for “High Yield,” but only the title writers know for sure.)

Of course, including stocks with yields of less than 2% reveals something about the technique employed by the authors, who seem to be equating any yield higher than that of the S&P 500 as being OK to classify as “high.” But there are at least two reasons to consider this wrong, and frankly, I have to agree with the commentors that this tendency is nothing more than sloppy journalism, at best.

The first problem with this usage is the simplest one: Attaching the term “high” to anything above the average is far too liberal in terms of labeling. While 51% may be a majority, it certainly isn't a landslide, nor did a C student get a “high” score when his test came back with 74% of his answers marked as correct.

The second problem is that the S&P 500 Index is an inappropriate measure of yield, since it includes over 100 stocks that don't pay dividends and many others that don't have histories of dividend increases. Back in January, I spelled out why the index is such a poor yardstick for measuring dividend growth. So my only advice to readers to take with a grain of salt any article that includes the phrase “High Yield” or the more quizzical “High Dividend.”

Defining the Universe

To get a better handle on what dividend yields might be called low, medium, or high, I went back to the Champions spreadsheet (mentioned at the top of this article) and sorted all CCC stocks by yield. I think it's a valid proxy for the dividend-growth “universe,” since it includes all companies that have paid higher dividends for at least five straight years.

Companies that have increased their dividends for 1-4 years simply haven't yet established a “culture” of annual dividend increases, and those that have “frozen” or declining payouts simply fall outside the topic of discussion. As a preliminary step, I eliminated six companies that have agree to be acquired and two others that have announced plans to break up into two or three companies each.

That left 441 CCC companies, which divided evenly into three groups of 147 companies each, which I labeled Low, Medium, and High Yield. (I kept companies that have “overdue” increases – dividends that haven't been raised in over 12 months – because we can't really predict at this point which ones may “save” their streaks and which may fall by the wayside.) All prices and other data were as of June 30.

Before I write about the three groups, I think it's useful to spell out some of the numbers for the 441-stock universe from which they are derived. The average yield for these 441 stocks is 2.99%, more than a full percentage point higher than that of the S&P 500. The average stock has a streak of 16.9 years of dividend growth and a price of $47.53, whereas the most recent increases have averaged 8.51%, which is up from the 2010 calendar year increase of 7.8%, but still lower than the 3-, 5-, and 10-year Dividend Growth Rates of 9.9%, 12.7%, and 10.6%, respectively.

This universe includes only one stock, PennantPark (NASDAQ:PNNT) that yields over 9%, five that yield at least 8%, 13 that yield at least 7%, 33 that yield at least 6%, 61 that yield at least 5%, 111 that yield at least 4%, 187 that yield at least 3%, 283 that yield at least 2%, and 406 that yield at least 1%. That puts 126 companies in the “sweet spot” between 3% and 5%.

Yields for Every Taste

Many of the dividend growth numbers coincide with what we might expect. The low yield group has the highest dividend growth rate, and vice verse, but each group has attractive investment candidates and familiar names. Here are some of the details:

The low-yield group of 147 companies averages a yield of just 1.29% and ranges from 0.18% to 1.89%. With an average price of $58.85 and a streak of 15.0 years, the most recent increases average 15.02%, whereas the 1-, 3-, 5-, and 10-year DGRs were 12.0%, 13.8%, 17.0%, and 14.2%, respectively. Home to such familiar names as CSX Corp. (NYSE:CSX), FedEx (NYSE:FDX), Hormel (NYSE:HRL), Praxair (NYSE:PX), and Walgreen (WAG), it includes 25 Champions, 52 Contenders, and 70 Challengers.

The medium-yield group of 147 companies averages a yield of 2.66% and ranges from 1.89% to 3.45%. With an average price of $47.11 and a streak of 20.3 years, the most recent increases average 10.46%, whereas the 1-, 3-, 5-, and 10-year DGRs were 8.0%, 9.7%, 11.8%, and 10.3%, respectively. Home to such familiar names as 3M Company (NYSE:MMM), Coca-Cola (NYSE:KO), Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), and Wal-Mart (NYSE:WMT), it includes 46 Champions, 45 Contenders, and 56 Challengers.

The high-yield group of 147 companies averages a yield of 5.02% and ranges from 3.45% to 9.63%. With an average price of $36.63 and a streak of 15.5 years, the most recent increases average 4.91%, whereas the 1-, 3-, 5-, and 10-year DGRs were 6.2%, 8.6%, 11.9%, and 9.6%, respectively. Home to such familiar names as Altria Group (NYSE:MO), AT&T Inc. (NYSE:T), Intel (NASDAQ:INTC), Kimberly-Clark (NYSE:KMB), and Kinder Morgan Energy Partners LP (NYSE:KMP), it includes 29 Champions, 38 Contenders, and 70 Challengers.

While some of the data confirms expectations, it's clear that each group offers many attractive investment candidates. The dividend “sweet spot” of 3-5% yield starts just above the mid-point (or average yield of 2.99%) and stretches into the high-yield group, which tends to confirm the notion that investors focused on that characterization are looking for above average yield and dividend growth, without taking on the perceived risk of higher-yielding stocks, which also might offer slower dividend growth.

As I mentioned at the start, I don't intend to settle the “debate” and it's clear that each investor can fulfill his or her strategy by owning dividend growth stocks, whether that investor is young and looking to own low-yield/high-growth stocks, in or near retirement and looking to own high yield/low-growth companies, or somewhere in between.

As always, please add your thoughts, questions, or suggestions in the comment section below.

Disclosure: I am long CSX, HRL, PX, MMM, KO, JNJ, PG, MO, T, INTC, KMB.

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