One of the true joys of long-term investing is that eventually you can end up with a yield on your original investment that is well into the double digits. For someone aged 45, for instance, a portfolio of stocks bought with solid dividends (and dividends that rise year after year) could provide them with a very comfortable retirement income.
It helps to start with companies that are already have a competitive yield. That does not mean that one has to just fill up one's portfolio with a bunch of sluggish, boring old firms. You need a combination of both a good starting yield and growth of the dividend to generate a really eye-popping yield on original cost.
Of course, it is impossible to know about future dividend growth, but generally companies that have a history of raising the dividend tend to continue to do so. One telltale sign that dividend growth might not continue is if the payout ratio gets too high. Generally speaking, you don't want to see any company pay out more in dividends than it is earning.
The only exception to that would be if the company were in a seriously declining industry where investing for the future would be a waste of money. For example, if your key product was being eliminated by government decree in a few years.
How the List Was Compiled
The following list of companies all have market capitalizations of over $500 million, and thus should be investable for most readers. To avoid companies that are likely to plunge in the near term (and which might be good candidates for long-term dividend investing after they do so) I eliminated all firms with Zacks Ranks of #4 (Sell) or #5 (Strong Sell).
The Zacks Rank is a great short-term indicator for a stock, but has almost no bearing at all when it comes to long term investing. But still, who wants to buy a stock for the long term, only to see it plunge 10 or 15% shortly after your purchase?
While there are no #1s on the list, you might want to buy the #2s sooner than the #3s here. They also have dividend yields of over 2.5%. That is a competitive current return with any government bond shorter than 7 years or so.
I applied a fairly stringent requirement that they could not be paying out more than 60% of their current earnings in dividends. That should leave them with plenty of cash to grow the business into the future, and thus provide the earnings growth needed to sustain dividend growth.
Finally, they have all grown their dividends by at least 15% per year over the last five years. That means they are cutting you a check each quarter that is at least twice as large as they cut for shareholders five years ago.
If that dividend growth can be sustained for the next 20 years, it would mean that a company that is now providing a yield of 2.5% would be yielding 40% based on original cost 20 years from now. That is probably a stretch for most of these companies, but even if dividend growth were to slow to 10% per year for the next 20 years, the eventual yield on cost would be 16.8%.
At 5% growth, the yield would be 6.6%, which is still better than a sharp stick in the eye. Of course, if you were to reinvest your dividends along the way, say through a drip program, your check when it come time to retire would be even more impressive.
An alternative way of looking at it is that provided the company is yielding the same amount at the end of your investment horizon as it is when you buy it, then your return will be the current yield plus the dividend growth rate.
If you want to generate a nice income for retirement, there are few better vehicles around than owning solid companies that have the ability to pay bigger and bigger dividends over time. The basic diversification rule of not putting all your eggs in one basket still applies. However, the list below would allow you to create a nicely diversified portfolio, not just by industry, but by market capitalization and geography as well.
CMS ENERGY (CMS): Free Stock Analysis Report
GARMIN LTD (GRMN): Free Stock Analysis Report
PHILIPPINE TEL (PHI): Free Stock Analysis Report
SAFETY INS GRP (SAFT): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
Zacks Investment Research
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Of course, it is impossible to know about future dividend growth, but generally companies that have a history of raising the dividend tend to continue to do so. One telltale sign that dividend growth might not continue is if the payout ratio gets too high. Generally speaking, you don't want to see any company pay out more in dividends than it is earning.
The only exception to that would be if the company were in a seriously declining industry where investing for the future would be a waste of money. For example, if your key product was being eliminated by government decree in a few years.
How the List Was Compiled
The following list of companies all have market capitalizations of over $500 million, and thus should be investable for most readers. To avoid companies that are likely to plunge in the near term (and which might be good candidates for long-term dividend investing after they do so) I eliminated all firms with Zacks Ranks of #4 (Sell) or #5 (Strong Sell).
The Zacks Rank is a great short-term indicator for a stock, but has almost no bearing at all when it comes to long term investing. But still, who wants to buy a stock for the long term, only to see it plunge 10 or 15% shortly after your purchase?
While there are no #1s on the list, you might want to buy the #2s sooner than the #3s here. They also have dividend yields of over 2.5%. That is a competitive current return with any government bond shorter than 7 years or so.
I applied a fairly stringent requirement that they could not be paying out more than 60% of their current earnings in dividends. That should leave them with plenty of cash to grow the business into the future, and thus provide the earnings growth needed to sustain dividend growth.
Finally, they have all grown their dividends by at least 15% per year over the last five years. That means they are cutting you a check each quarter that is at least twice as large as they cut for shareholders five years ago.
If that dividend growth can be sustained for the next 20 years, it would mean that a company that is now providing a yield of 2.5% would be yielding 40% based on original cost 20 years from now. That is probably a stretch for most of these companies, but even if dividend growth were to slow to 10% per year for the next 20 years, the eventual yield on cost would be 16.8%.
At 5% growth, the yield would be 6.6%, which is still better than a sharp stick in the eye. Of course, if you were to reinvest your dividends along the way, say through a drip program, your check when it come time to retire would be even more impressive.
An alternative way of looking at it is that provided the company is yielding the same amount at the end of your investment horizon as it is when you buy it, then your return will be the current yield plus the dividend growth rate.
If you want to generate a nice income for retirement, there are few better vehicles around than owning solid companies that have the ability to pay bigger and bigger dividends over time. The basic diversification rule of not putting all your eggs in one basket still applies. However, the list below would allow you to create a nicely diversified portfolio, not just by industry, but by market capitalization and geography as well.
CMS ENERGY (CMS): Free Stock Analysis Report
GARMIN LTD (GRMN): Free Stock Analysis Report
PHILIPPINE TEL (PHI): Free Stock Analysis Report
SAFETY INS GRP (SAFT): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
Zacks Investment Research
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