There is a correlation between increasing dividends and strong investment performance, even if a stock has a low dividend yield when you buy
These are two of the stocks passing a screen for highest dividend increases over the past five years - both have outperformed the S&P 500 by wide margins.
You might not be impressed by a stock with a 2% dividend yield as long-term interest rates have been rising quickly in the bond market. But a screen of the S&P 500 shows that companies that have raised their payouts the most have tended to be strong overall performers for long-term investors.
Early on Wednesday, 10-year U.S. Treasury notes BX:TMUBMUSD10Y were yielding 4.97%, up from 4.47% at the end of June and from 4.17% at the end of last year. Investors have been selling off bonds (which drives up market yields) in anticipation of a decision by the Federal Reserve to raise its target range for the federal-funds rate.
Rising yields mean new opportunities for investors who wish to hold bonds for interest income. So why consider a stock with a dividend yield of 2% or less?
The answer is that your goals as an investor might be better served by building investment income while pursuing long-term growth in the stock market.
If you had purchased Goldman Sachs's (GS) stock at the Sept. 15, 2021 closing price, for example, you would have paid $401.95 a share. At that time, the company was paying a quarterly dividend of $2 a share, for an annual payout of $8. The dividend yield at that time was 1.99%.
If you had held your Goldman stock for five years, your quarterly dividend would have increased to $5 a share. The stock's current yield, based on Tuesday's closing price of $976.67, is 2.05%. That is what the yield would be for a new investor. But your dividend yield on your five-year-old shares, based on what you paid for them, would be 4.98%. Meanwhile, the share price increased by 143%. If you had reinvested your dividends, your five-year total return would have been 174%.
Screening the S&P 500 for dividend compounders
To look back at how stocks of companies that increased dividends significantly have performed over the past five years, we should start with a minimum yield. We began with the 273 companies in the S&P 500 SPX whose stocks had dividend yields of at least 1.00% five years ago.
Then we sorted the list by five-year compound annual growth rates for dividend payouts. Among the 273 companies, 15 have had a five-year dividend CAGR of at least 15%:
Company 5-year dividend CAGR Current dividend yield Dividend yield on shares purchased five years ago Five-year price change Five-year total return Ares Management 23.5% 4.18% 6.80% 63% 89% Goldman Sachs Group 20.1% 2.05% 4.98% 143% 174% Wells Fargo 20.1% 2.23% 4.29% 92% 117% EOG Resources 19.8% 2.65% 5.42% 104% 159% Diamondback Energy 19.6% 2.08% 5.39% 159% 221% SLB 18.7% 2.18% 4.04% 85% 107% Darden Restaurants 18.2% 2.93% 4.11% 40% 66% Tractor Supply 18.2% 2.91% 2.34% -19% -12% American Express 17.2% 1.17% 2.36% 101% 114% KLA 17.0% 0.55% 2.50% 357% 380% Williams-Sonoma 16.4% 1.37% 3.30% 140% 164% Microchip Technology 15.8% 2.55% 2.24% -12% -2% Raymond James Financial 15.7% 1.28% 2.38% 86% 100% Steel Dynamics 15.3% 0.89% 3.26% 268% 297% Eli Lilly 15.3% 0.61% 2.96% 386% 409% Source: FactSet
It turns out that 12 of these 15 companies saw their stocks have five-year total returns - with dividends reinvested - exceeding the S&P 500's five-year return of 82.2% through Sept. 15, according to data provided by FactSet.
It is easy to look back and see that stocks of the highest dividend compounders have tended to perform well. This screen can be part of your own research as you form your own opinions about which companies are likely to remain competitive and maintain their policies for dividend increases.
One way to begin your research is to click on the tickers for more information.
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-Philip van Doorn