|TheStreet.com, Fall, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
NEW YORK (TheStreet) — With 10-year Treasuries yielding stubbornly below 2%, the hue and cry among advisers has been to look for higher yielding dividend stocks. That might be decent advice for a whole lot of folks who need yield, but it’s incomplete.
Specifically, investors should be looking for high yield stocks that have a track record of growing their dividends.
Not only is this sound advice, but it’s applicable to a lot more investors.
The most obvious investors for this kind of strategy are retirees and near retirees, looking for income.
The chart below shows a group of companies that have at least doubled their dividend during the past 10 years.
That means shareholders who have owned them during the past 10 years have doubled their income too.
Many have enjoyed strong capital gains along the way.
For instance, in November 2002, McDonald’s (MCD) shares were about $16. Today they’re about $87.
But a buy-and-hold (and watch!) strategy can also deliver the kind of growth that even conservative investors who want to preserve capital can get behind. Specifically, in the chart above, consider Darden (DRI), which has seen its dividend rise nearly 30 times during the past 10 years.
Now here’s what’s interesting. In November 2002, Darden shares were $21.63 and paid an annual dividend of about 16 cents a share for a yield of approximately 0.75%. If you made a $10,000 investment at the time, you would have about 462 shares. Assuming you did not reinvest the dividends, your 462 shares would be throwing off $924 of cash, for a cash on cash return of 9.24% annually, a figure which handily beats the S&P 500 five and 10 year performances.
One other stock that should be on the list is Altria Group Altria (MO). It frequently does not show up on charts like this because the 2008 spinoff 2008 spinoff of Philip Morris (PM) distorts the picture, requiring a little more analysis. Basically, if you owned the stock in 2002 and you still hold it, you’ve done very well in income as well as capital appreciation.
With respect to income, when the spinoff of Philip Morris International was completed in March 2008, MO shareholders received one new share of PMI for every MO share they had. In 2002, MO was paying a dividend of $2.44 annually. Today the two companies combined are paying $5.16, for a picture perfect double.
Although there is no way to guarantee these companies will continue to raise their dividends. There are good reasons to believe that they will. Given all of the companies shown above have plenty of cash on their balance sheet, there are no fiscal hurdles to prevent them from raising dividends in the near term. Moreover, even during the financial crisis, the companies above continued to pay and increase their dividends.