In today’s video, I’m going to explain why dividend growth is the most important
factor for a long-term dividend investor.
To make this case, I created a quick model that shows how a $1,000 investment will project
out over the span of 30 years.
I will compare 3 stocks each with a different dividend yield on cost and dividend growth
rate.
They will represent 3 archetypes: a low-yield stock with high growth, an average-yield stock
with average growth, and a high-yield stock with low growth.
Let’s dive into the dividend data.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video.
Now, I’m going to pick specific stocks as examples.
However, think of these more as educational sets of data.
There are plenty of different stocks I could mention or include in these roles.
First, we have our low yield and high growth stock.
For this, I selected Visa, ticker symbol V.
The current stock price is $208.70 so with a $1,000 investment we’d be able to purchase
4.79 shares.
If we look at Visa in my stock research tool available at dividenddata.com, you can see
the forward-looking annual dividend is $1.80.
At the current price, this gives Visa a low 0.86% dividend yield.
However, Visa is a dividend growth machine.
Over the past 5 years, the compound annual growth rate of the dividend is 17.69%.
In fact, they just had a 20% dividend increase and a 17.19% increase in the year prior.
This growth is very sustainable and backed up by earnings growth.
Visa has a low payout ratio of 21% so plenty of room to increase the dividend over time.
So as a conservative estimate, let’s say Visa can grow its dividend at a 15% compound
annual growth rate.
When we project that forward you can see that growth seems slow, but in the later years
explodes with exponential growth.
At year 10, the annual dividend per share is now projected to be $6.33, which is a 3.03%
yield on cost.
You’d only be earning $30.34 that year on your $1,000 initial investment.
That doesn’t seem that impressive does it?
However, let’s go farther down that growth curve.
At year 20, the annual dividend is $25.62, which is a 12.27% yield on cost.
You’re now earning $122.75 a year.
At year 30, the annual dividend per share has grown to $103.64.
That is now a 49.66% dividend yield on cost.
That means you’re earning $496.58 a year off your initial $1,000 investment.
You’d be doubling your money every 2 years from dividends alone.
The true power of consistent high dividend growth is only realized over a long time horizon.
Investors who bought Visa stock a decade ago are already experiencing a small part of this.
Historically, the starting dividend yield for Visa has never been higher than 1%.
Despite this, those who bought the stock in 2010 have nearly a 9.6% dividend yield on
cost.
Similar to my model, this will only continue to climb as Visa keeps growing its dividend
at high rates.
The second stock example is average yield and growth.
For this, I selected Proctor & Gamble, ticker symbol PG.
The current stock price is $150.92 so with a $1,000 investment we’d be able to purchase
6.63 shares.
If we look at the stock on my research tool, you can see the forward-looking annual dividend
per share is $3.65.
At the current stock price, this gives it a 2.42% dividend yield.
P&G is an extremely reliable high-quality business.
It’s been consecutively growing it’s dividend on an annual basis for 66 years.
Over the past 5 years, the compound annual growth rate of the dividend is 5.28%.
This seems sustainable moving forward based on the earnings growth and payout ratio.
Let’s go back to my model and project out 30 years of dividend growth at 5.28%.
By year 10, the annual dividend per share has grown to $5.80 with a 3.84% dividend yield
on cost.
You are definitely earning way more dividends in the early years compared to Visa.
However, the slow growth starts to punish the stock in comparison by year 13.
It’s at that point Visa pulls away and blows past P&G in yield on cost.
By year 30, Procter & Gamble is projected to have an annual dividend per share of $16.23.
This gives it a 10.75% yield on initial cost.
Despite earning far more dividends in the first few years, Visa crushes P&G in cumulative
dividends earned.
Over those 30 years, P&G earned $1,686.27 in dividends, while Visa is projected to earn
$3,749.60.
Now some of you may be wondering…
But Zach, Proctor & Gamble had a relatively low starting dividend yield?
How far does the power of dividend growth take us?
Let’s compare to a high dividend-yielding stock with low growth.
For this, I selected Verizon, ticker symbol VZ.
The current stock price is $37.40 so with a $1,000 investment we’d be able to buy
26.74 shares.
If we look at my stock research tool, you can see that Verizon has a forward-looking
annual dividend per share of $2.61.
At the current price, this gives it a 6.98% dividend yield.
This is much higher.
Verizon is a consistent dividend grower but at a much slower rate.
Over the past 5 years, the compound annual growth rate of the dividend is 2%.
This is likely sustainable moving forward.
Back at my model, let’s project 2% dividend growth over the next 30 years.
You can see that there is a massive difference in the early dividends received as expected.
By year 10, the annual dividend per share is $3.12, giving it an 8.34% yield on cost.
This means you’re earning $83.40 in dividends that year from your $1,000 investment.
Cumulatively, you’ve earned $764.14 in dividends over those 10 years.
That’s a huge difference compared to Visa’s $175 in year 10.
However, by year 19 Visa passes Verizon in dividend yield on cost.
From there the gap only expands due to the difference in growth rates.
By year 30, Verizon is projected to have a $4.63 annual dividend per share, giving it
a 12.39% yield on cost.
This is $123.93 in year 30, compared to Visa’s projected $496.58.
In cumulative dividends earned, Verizon generated $2,831.
Visa actually was able to surpass Verizon with $3,749.
This is despite Verizon’s early lead.
This example is designed to illustrate the importance of dividend growth.
If you’re investing over a long time horizon, you want a business that can compound consistently
at a high rate.
You want a business that can multiply earnings decade after decade, dwarfing its former self.
Increasing the earning power of a business will dramatically increase the capacity to
pay and increase dividends.
Not to mention that increase in stock price that will likely follow suit.
On this channel, we’ve discussed how it’s important to get a stock at a good value,
maximize your yield on cost, etc.
However, if you don’t pick a business that can keep growing then time will not be your
friend.
Over the long term, the ability to grow multiple times over so outweighs these other factors.
Personally, I’m 23 years old so I have a very long time horizon with investing.
It’s for this reason that I’ve been focusing my strategy more on dividend growth.
30 years from now I will have planted some seeds, growing into massive dividend trees.
However, it should be noted that reality does not stop 30 years from now.
Economic growth continues.
For example, 99% of Warren Buffett’s wealth was generated after the age of 50.
This is because time is the most important variable in investing.
The longer you are able to compound your money, the better.
This is why it’s important to start investing as early as you can so time is on your side.
However, there is one key factor I left out in this analysis.
This is something us dividend investors know and love.
That is the power of dividend reinvestment.
Luckily, I’m about to cover this in a new video coming soon.
Make sure to hit subscribe for that.
It should be noted that a key assumption in this model is the dividend growth rate.
Future performance is not 100% certain and it’s quite possible any individual business
could get disrupted.
This is why it’s important to research your investments, stay diversified, and be willing
to alter your strategy when information changes.
Thank you for watching Dividend Data.
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