As part of my retirement “bucket strategy”, I am building a watch list of “growthier” dividend stocks that can boost my portfolio’s income decades from now.
After evaluating several potential candidates for my watch list, I decided to analyze three in detail – Starbucks, Costco, and Nike.
While Starbucks looks most attractive for my portfolio, all three stocks are trading near or below fair market value today!
I hope this article helps you think about your own portfolio strategy with respect to growthier dividend stocks!
My husband and I plan to retire in December, 2020. "House Spouse" will be 68 and I will be 59½. Our plan in retirement is to live off the income produced by our DGI portfolio, our rental properties, and Social Security.
With 3¼ years left in our accumulation phase, I am working on our retirement "bucket strategy". At the near-term end of our time horizon, I am beefing up our emergency cash reserves. At the far end of our retirement timeline, I am building a watch list of "growthier" dividend stocks that could help boost my portfolio's income thirty or forty years from now. This watch list will serve double duty. It will also help build out my daughter's millennial DGI portfolio. She is 24 years old and has 40 years until retirement and, hopefully, another 30 years after that.
This means that I am looking into my crystal ball to find DGI stocks that can deliver income growth for the next 70 years!
What are "growthier" DGI stocks?
Before we jump into possible watch list candidates, what do I mean by "growthier" DGI stocks? My definition (your mileage may vary!) of a growthier DGI stock is one that 1) has a dividend yield of less than approximately 2% and 2) a healthy double-digit forecast dividend growth rate (i.e., a projected dividend growth rate of more than 10%).
The idea is that, even though growthier DGI stocks may have low yields now, their higher dividend growth rates can hedge a DGI portfolio against inflation in the outlying years of retirement. This is because a growthier DGI stock's income stream can grow larger over time than a higher-yielding but lower-growing DGI stalwart.
Forecasting the future is hard. So, how do I estimate a stock's forecast dividend growth rate? I average the dividend forecasts of David Fish's CCC list (columns CH through CK on the latest spreadsheet) available here, with forecasts from F.A.S.T.Graphs and Valuentum (available by subscription).
Of course, no one knows what the dividend growth rate of any stock will be in three years, much less 30, 50, or 70 years from now. So, I also look at each stock's actual 5-year historical dividend growth rate to confirm that there already exists a baseline of growthy dividend performance.
Today, my retirement portfolio holds only one DGI stock that is on the borderline of what some might consider growthy: Microsoft (MSFT). When I purchased it, Microsoft's projected 3-year dividend growth rate was 12.3%. Today, its 3-year dividend forecast growth is only 9.7% and its dividend yield is 2.1%. This puts Microsoft on the margin since its dividend forecast growth has recently fallen below double digits and its yield is slightly above 2%. Even so, Microsoft provides a strong baseline against which I can evaluate the attractiveness of true growthy stocks. To be appealing for our portfolio, if a stock has a dividend yield lower than Microsoft's, then it should have a higher dividend growth rate.
In contrast to the relative lack of adventurousness in our portfolio, my daughter's portfolio holds three truly growthy DGI stocks: Apple (AAPL), Disney (DIS), and Visa (V). Below is a table that shows key metrics for my borderline growthier stock - Microsoft - and my daughter's growthier holdings.
By the way, if you are interested in learning more about my Dividend House Sleep Well At Night (SWAN) rating (shown in the last column in the table above), please check out my article, Using My SWAN Decision Tree to Rate DGI Stocks. Ratings above 15 are outstanding!
Which "growthier" DGI stocks should I be considering?
Now for the fun part - the treasure hunt!
For inspiration, I looked at the portfolios of several Seeking Alpha authors who have long investing time horizons or have been more adventurous in investing in growthier DGI stocks. Those portfolios reveal some interesting possibilities: Starbucks (SBUX), Costco (COST), Nike (NKE), Mastercard (MA), Becton Dickinson (BDX), Medtronic (MDT), Home Depot (HD), Lowe's (LOW), Raytheon (RTN), Texas Instruments (TXN), CVS (CVS), McKesson (MCK), Broadcom (AVGO), and Pentair (PNR)
I eliminated most of these from consideration before conducting further analysis. Because I want to rely on growthy stocks to increase their income for decades, I am looking for holdings that will consistently deliver a double-digit dividend growth rate, a high credit quality standard and, ultimately, a strong dividend income. For example, Mastercard was eliminated because of its paltry dividend yield of 0.6% and the fact that my daughter already holds Visa in her portfolio. I disqualified Raytheon because its dividend is forecast to grow only 8.6% for the next three years. Pentair was excluded because, in the last 20 years, its dividend yield never climbed above 2.9% (it currently sits at 2.2%). I ousted Broadcom due to its BBB- credit rating.
After some consideration, I ended up with three potential stocks for my watch list that meet my definition of growthier and are attractive according to my metrics: Starbucks, Costco and Nike.
With the caveat that we can't know which stocks will fulfill their promise of dividend growth, which of the above candidates look most appealing?
In my article, Are Growthier Stocks Worth It?, I derived some rules that can help determine which stocks are more attractive for a DGI portfolio. In my most recent article, Should I buy Archer Daniels Midland, General Mills, or Genuine Parts Company?, I applied these rules to help determine which stocks looked most attractive from a forecast income perspective.
The most important lesson from these articles is - Even if a stock has a higher dividend growth rate, it DOES NOT ALWAYS mean it will eventually produce more income than a slower-growing dividend stock! I have applied the lessons learned from both articles to evaluate the list of all seven growthier stocks either already in our portfolios or under serious consideration in the table below. (Green highlights the highest value for each metric shown.) Here are my top three takeaways from this analysis:
- Starbucks has the highest future Chowder number and the second highest dividend yield (after Microsoft). Therefore, a purchase of SBUX would immediately produce more dividend income than any other stock on this list except Microsoft. Given SBUX's higher dividend growth rate, its dividend stream should overtake Microsoft's eventually. With a very compelling Dividend House SWAN rating of 17, I will consider acquiring SBUX for both my daughter's DGI portfolio and for my own.
- Apple has the second highest future Chowder number and the third highest dividend yield (after Microsoft and Starbucks). Therefore, a purchase of AAPL would immediately produce more dividend income than any other stock on this list except Microsoft and Starbucks. This confirms my decision to purchase AAPL for my daughter's portfolio. Given my daughter's purchase price of AAPL at $102.66, I only wish I had purchased some AAPL for my own portfolio at the same time!
- Since Microsoft has a higher forward Chowder number and a higher dividend yield than Disney, it should always produce more dividend income than Disney will. I'm crossing Disney off my portfolio's watch list, although I will continue to hold DIS in my daughter's portfolio (since she already owns it).
Are any of the "growthier' stocks reasonably priced?
From a metrics standpoint, I view all seven of the growthier stocks discussed here as attractive. But, are any of these seven stocks attractively priced? To determine the answer to this question, I average the fair value estimates of three sources: Morningstar, ValuEngine, and Valuentum. I also look to see if a stock is trading below its (BLUE) normal P/E ratio line on F.A.S.T.Graphs.
Below is a table of the resulting fair value estimates for each of the seven stocks.
Three of them - Disney, Starbucks, and Nike - are trading below the average of all three analysts' fair value estimates. (I have highlighted their current stock prices in green.) A quick look at F.A.S.T.Graphs confirms that all three stocks are trading at or below their normal P/E ratios, confirming that all three are attractively priced today.
Below is a F.A.S.T.Graphs snapshot of Starbucks illustrating that it is trading below its 10-year normal P/E ratio (the blue line) and, thus, is attractively priced.
Our DGI portfolio will be our largest income stream in retirement, producing more than 75% of our income until Social Security kicks in for both of us in 2022. Even after we begin receiving Social Security, our DGI portfolio will continue to produce more than 60% of our total retirement income.
Due to the importance of our DGI portfolio's income stream throughout our retirement years, we have focused on building our portfolio using dividend growth stalwarts - stocks that we think will pay a reliable, growing stream of dividends for decades. Given that we hope our retirement lasts 30 or 40 years, we want to ensure that we also hold some dividend stocks that may not pay a large dividend now but will grow into tomorrow's dividend stalwarts.
Since no one really knows what the dividend growth of any particular stock will be in the future, what percentage of our portfolio should be in these potential "up and comers"? Until our portfolio's dividend income builds past what we need for annual expenses, I am considering allocating up to 5% of my portfolio's income to the growthier names. Once our portfolio is producing more income than we need, I may be willing to apportion more of my retirement portfolio to them. But, how much of my portfolio should ultimately be in growthier names? What percentage of the income above what I need for annual expenses should these growthier names contribute? I'm still working on the answers to these questions.
Of the stocks originally considered and those that I analyzed, Starbucks is the most attractive for our retirement portfolio. A purchase of SBUX would immediately produce more dividend income than any other stock on this list except Microsoft. More to the point of this exercise, given SBUX's higher forecast dividend growth rate, its dividend stream should overtake Microsoft's eventually.
Given the market's high valuation, I am surprised to see that all of the growthier names analyzed here are trading at reasonable market prices today. Is this a fluke? Or, is the market currently discounting lower-yielding dividend stocks compared to higher-yielding dividend stalwarts?
I am still figuring out how much of my portfolio's income should ultimately be generated by growthier stocks. Once my portfolio covers my anticipated annual expenses in retirement, I will need to decide how much of my excess portfolio income should be contributed by growthier names.
I would love to hear your thoughts! Which growthier dividend stocks have you invested in? Why did you invest in them? Which growthy stocks are on your watch list? What percentage of your portfolio are you devoting to growthier dividend stocks?
I hope this article helps you to further your thinking about your own portfolio strategy with respect to growthier dividend stocks!
Disclosure: I am/we are long ABBV, ABT, ADM, AMGN, AVA, BBL, BMY, CAH, CBRL, CLX, COP, CSCO, CVX, D, DEO, DLR, DUK, ED, EMR, EPD, GE, GILD, GIS, GPC, HCP, IBM, JNJ, KHC, KMB, KMI, KO, LMT, LNT, MCD, MMM, MMP, MO, MRK, MSFT, NEE, O, OHI, OMI, PEP, PFE, PG, PM, SCG, SEP, SO, SYY, T, UL, UPS, UTX, VTR, VZ, WEC, WPC, XOM. 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.