The Advantages of Choosing Dividend Compounders for Income Hunters over High-Yielding Stocks
For investors seeking income in the short term, high interest rates on bank CDs and savings accounts may seem appealing. However, for those looking to build a retirement nest egg and draw income from it in the long term, dividend compounders may be a better strategy. These are stocks of dividend-paying companies that have consistently increased their payouts over time.
While some stocks with high current dividend yields may appear attractive, they often come with risks. These high yields can be a warning sign that investors expect dividend cuts, resulting in relatively low valuations for these stocks. In fact, analysis shows that many of the stocks with the highest dividend yields 20 years ago have underperformed the market.
To identify the best dividend compounders, a screening of the S&P 500 was conducted based on companies that have significantly increased their dividends over the past five years. These companies may not have had high dividend yields five years ago, but their strong overall performance and tendency to beat the index’s total return make them attractive options.
One example is Goldman Sachs. If an investor had purchased shares of Goldman Sachs five years ago, they would have seen their quarterly dividend increase from $0.80 to $2.75 per share, resulting in a current annual payout of $11. This represents a compound annual growth rate (CAGR) of 28.01% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at an estimated CAGR of 6.16% over the same period.
While the current dividend yield for new investors in Goldman Sachs is 2.86%, those who held onto their shares for five years would have a yield of 5.74% based on their initial purchase price. Additionally, the share price would have doubled, resulting in a total return of 126% compared to the S&P 500’s 101% return.
A screening of the S&P 500 identified 20 companies with the highest dividend compound annual growth rates over the past five years. These companies include Goldman Sachs, Freeport-McMoRan, Newmont Corp, Morgan Stanley, and Lowe’s Cos. Inc., among others. Most of these companies have outperformed the S&P 500 over the past five years, with Snap-on Inc. being the closest to matching the index’s return.
It is important to note that some of these companies have unique dividend structures, such as Freeport-McMoRan’s performance-based payout and Newmont Corp’s dividend based on spot prices for gold. However, despite these variations, these companies have still shown strong dividend growth and overall performance.
In conclusion, choosing dividend compounders over high-yielding stocks can provide long-term investors with a more reliable and potentially lucrative income stream. By investing in companies with a track record of increasing their dividends over time, investors can benefit from both dividend growth and capital appreciation, resulting in higher total returns compared to the broader market.
