We have all heard it... Stodgy, for old people, yawn, boring! These have all been used to describe investing in dividend growth stocks. Nevertheless, I am a firm believer in dividend growth stocks for building a bullet-proof retirement portfolio. Study after study has shown that most of the historical stock market returns have come from reinvested dividends.
My core portfolio contains traditional dividend growth stocks that are found in virtually every dividend growth portfolio. Why? Because not only do they provide a growing income but their total return over time usually beats the market. Consider these:
ConocoPhillips Co. (NYSE:COP)
Current Yield: 3.4% | Yield On Cost: 5.1%
First Purchased: 3/2011 | Average Annual Return: 21.0%
Genuine Parts Co. (NYSE:GPC)
Current Yield: 2.7% | Yield On Cost: 4.6%
First Purchased: 5/2009 | Average Annual Return: 22.5%
Illinois Tool Works Inc. (NYSE:ITW)
Current Yield: 1.9% | Yield On Cost: 4.0%
By Maria Halmo
Please see Part 1 for an introduction to the study that explains how the baskets were determined.
Which quintiles perform the best, and in which markets?
Lower yields may be associated with higher growth, as investors price future distribution increases into current valuation. Lower yields may also be associated with larger companies, which generally own assets across more basins serving different functions along the energy value chain, thereby diversifying risk. With a company of size, however, larger and larger projects must be built (or assets acquired) in order to grow. So, a knee-jerk reaction to buy the lowest-yielding names can lead to underperformance, as evidenced by Basket 5 returning 61% on a price-return basis during the study period as compared to a 108% return for the AMZE.
The middle quintile (Basket 3) also underperformed the index. When a company was acquired or otherwise delisted, it was not
The search for yield has led many adventurers into our fertile lands. With Treasury rates still floating around 2%-3%, novice and veteran investors alike have turned to MLPs to fortify their portfolios. For many, the chase for yield has turned into a hunt for growth, but some investors are still singularly focused on finding the highest-yielding stocks out there. In our experience, we find that MLPs, just like traditional stocks, can have high yields for a reason—investors are paid to take on the additional risk of those companies. So at what point do the risks outweigh the benefits? How could you possibly go wrong with a stock paying out a 10% yield? Like many things in life, it’s all about balance.
This month’s research spotlight focuses on the dispersion of returns between the highest-yielding names in the sector and the lowest-yielding names. For this analysis, we used