High-Yielding, Low Growth Rates Vs. Low-Yielding, High Growth Rates

| About: Nike Inc. (NKE)
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Summary

Often, a stock with a high yield has a lower dividend growth rate (DGR).

The inverse is also true with a low yielding stock having a higher DGR.

I've compared two well known examples of each with results I hadn't anticipated.

On a previous article, Paying My Bills With Dividends - Update, I received a comment regarding the comparison between high yield, low DGR stocks like Verizon (NYSE:VZ) and AT&T (NYSE:T) versus low yield, high DGR stocks like Nike (NYSE:NKE) and Disney (NYSE:DIS). I had stated that due to my long investment timeline, I focused more on the 5 and 10 year DGR than having a big current yield. The comment questioned this thesis and since I hadn't done the math, I decided to do some research with some real life examples and come to some sort of conclusion.

For this comparison, I chose VZ as the example of a high yield, low DGR stock. VZ has a history of 12 years of dividend growth with a 5 year DGR of 3.0%. The current yield that I'll use for the calculations is 4.4%. Even though my portfolio is built for a 30 year goal, I'll determine dividend income at 5, 10, 15, 20, and 25 years for those with a shorter investment horizon.

The low yield, high DGR stock that I will use is NKE. NKE has a 15 year dividend growth history with a 5 year DGR of 15.6%. The current yield is 1.4%. I wanted to be as fair as I could in this comparison so metrics involving stock value and payout ratio were completely excluded. This is simply as estimate of future dividend income based on history. I'll use an initial investment of $100,000 with all dividends reinvested for simplicity's sake.

Comparison of Dividend Income
5 years 10 years 15 years 20 years 25 years
NKE $2623 $5752 $12610 $27648 $60616
VZ $5854 $8365 $11954 $17082 $24409

Based on these results, it would appear that the length of investment can make quite the difference when choosing between these two types of stocks. You can see that after 5 years, VZ is generating over twice the cash of NKE and around 40% more at 10 years. The point where NKE crosses VZ in terms of income is between year 14 and 15. At 20 years, NKE is about 60% higher than VZ and at 25 years, the roles have been reversed with NKE more than doubling VZ.

This calculation does make a lot of assumptions. NKE's DGR could, and probably will, slow down. I don't think it will slow to the point of its dividends not passing VZ's over the course of 25 years. However, VZ's DGR could also slow down causing NKE to pass it sooner than calculated. Another major assumption I've made is the primary focus on dividend income. For me, this is a huge goal of my portfolio but I realize everyone's goals and time lines are different. I think most people can agree that NKE has more room for capital gains than VZ. Frankly, I think both companies would be great investments which is why they are both holdings of mine. I feel like their yield and DGR contrasts actually compliment each other very well as part of my portfolio. Thanks for reading.

Disclosure: I am/we are long VZ, T, DIS, NKE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.