You want to be rich and you would like for it to happen now. There’s good news and there’s bad news. Good news- You can be rich. Bad news- It’s going to take some time. There are profits to be made in endlessly searching for undervalued stocks or making cents on the dollar day-trades. But these options aren’t necessarily viable or appropriate, especially if given stringent individual risk tolerances.
The equation of wealth is usually a product of time.
What is your Modus operandi? If you’re in to above average yields, double digit dividend growth rates and a strong history of making payouts, Altria (NYSE:MO) might just be the stock for you. This tobacco manufacture has not only paid but also increased dividend payments for 42 straight years and has a current yield of 5.6%. Many refuse to hold this smoking giant due to its ‘sinful’ business and after all a bad reputation and price add-ons, or “sin taxes”, can’t be good for business. But then again, with over a billion smokers consistently providing their inelastic demand MO does have significant pricing power. The 81% payout ratio is approaching worrisome, but the 5 year average dividend growth rate nearing 15% and strong payout history are promising. If Altria can keep the same growth rate for the next five years your yield on cost would double to over 11%; and that’s before any price appreciation.
Let’s say you can’t morally buy MO because of the negative health effects. Johnson & Johnson (NYSE:JNJ) could be another way to go. This $160 Billion healthcare company has consistently increased dividends for an impressive 48 straight years. The 3.6% current yield is above average and another dividend increase might be on its way very soon. Recently the stock has trended upward as JNJ announced its settlement with Merck (NYSE:MRK), after 2 years of arbitration. But it has remained relatively flat amidst the current overall uptrend, as a string of recalls has bogged JNJ down. The earnings announcement is set for Tuesday, April 19th before the bell and could be a turning point. The 45% payout ratio and strong history suggest dividends will continue to grow. Given the near 11% average 5 year growth rate, JNJ’s 3.6% current yield could turn into a 10% yield on cost in just 10 years.
JNJ was refreshing, let’s stick with the heath care sector and move on to Abbott Laboratories (NYSE:ABT). This Illinois based drug manufacture has increased dividend payouts for 39 straight years and has a current yield of 3.7%. The 65% payout ratio is in line and the dividend growth rate has been quite stable hovering around 10% for the 1, 3, 5 and 10 year averages. Further ABT has slightly increased its dividend payout growth rates as of late. If Abbott can keep it up for the next 10 years it’ll come in with a yield on cost just under 10%; do it for 20 years and it’ll be closer to 25%.
“Innovation would be stifled” according to Sprint CEO Dan Hesse, if AT&T (NYSE:T) were allowed to acquire T-Mobile. Is it true? Time will tell. Does AT&T have a strong dividend history? Yes it does. This No. 2 telecommunications firm has increased dividend payments for the last 27 years and has a current yield of 5.6%. True that yield was above 6% just a month ago, but it’s still well above average. T has a payout ratio of 51% and looks poised to stay in the business of paying shareholders. The average dividend growth rates don’t inspire much awe, hovering around 5%. At that pace it would take a little over 14 years for the current 5.6% yield to double to 11.2% (Thanks rule of 72!). AT&T’s current yield might be appealing for the short term, but its low dividend growth rate exposes the power of compounding growth in other stocks.
Think the AT&T deal will go through, enjoy cellphones, but you still don’t want to buy in? You could always move to current telecommunications No. 1 Verizon (NYSE:VZ). VZ doesn’t have the have the lengthy history of T, having increased its dividend payouts for just 6 straight years. The current yield of 5.2% is well above average, but has only been growing at just under 4% for the last 5 years. A quick check of the clearly unsustainable 213% payout ratio and investors should show great caution. Although to be fair, it had been in line in the past. With the averages, it would take VZ about 5 more years than T to reach the same 11.2% current yield and, as discussed, T wasn’t overly impressive. On a dividend level T looks like a better option if you’re choosing between the two, but those looking for big time yield on cost in the future might want to avoid these current high yield “traps”.
With that in mind let’s move to the lowest yielding stock on the list so far, McDonald’s (NYSE:MCD). Ok, so with a 3.2% current yield it isn’t exactly below average, but it does show the opportunity for growth quite well. In 2000 the current yield was just 0.7% and has since moved to the 3.2%, but the yield on cost has increased to 7.6% during that same period. That’s the power of growing dividends and time. MCD has been making monumental upgrades in its dividend payouts with a 10 year average dividend growth rate close to 27%. It has slowed to the low double digits as of late, but with the 53% payout ratio there’s plenty of room for future increases. Using a modest 10% dividend growth rate the yield on cost would double within 8 years. Or given a more optimistic 15% or 20% rate, yield on cost could hit double digits in that same 8 year span. Either way a reasonable yield and strong growth opportunities should prove promising for current investors.
Let’s take it down another notch in the current yield department and look at Exxon Mobil (NYSE:XOM). This oil giant has a current yield of 2% and has been increasing payments for 28 straight years. Just 10 months ago the current yield was closer to 3%, as a recent price appreciation has lowered yields. Add in that another increase should be coming this May along with the 28% payout ratio and you’re starting to paint the picture for income investors. The 5 year average dividend growth rate is close to 9%, although recently it has a slowed. Growing at 9%, it would take 8 years for the yield on cost to double and 13 years to triple.
Assuredly there are bounds of other dividend stocks that will perform as well or better. If you’re looking for stocks to provide long term dividend income wealth, it’s important that the company both pays dividends and increases them. It can be difficult to predict future payouts and easy to chase high yields. It’s important to realize the potential of strong dividend growth rates, but that’s not to say that current yield isn’t important. Here’s to double digit yield on costs!
Disclosure: I am long T.