Stock Investing 101 – Special Dividend

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Updated on April 7th, 2020 by Bob Ciura

Spreadsheet data updated daily

When a person retires, they no longer receive a paycheck from working. While traditional sources of retirement income such as Social Security help investors make up the gap, many could still face an income shortfall in retirement.

This is where high-yield dividend stocks can be of assistance. We have compiled a full downloadable list of stocks yielding above 5%.

You can download your full list of all 200+ securities with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:

This article examines securities in the Sure Analysis Research Database with:

Note: We update this article at the beginning of each month so be sure to bookmark this page for next month.

With yields between 5% and 10%, these securities all offer high dividends (or distributions). And with Dividend Risk Scores of C or better, they don’t suffer from the usual excessive riskiness of truly high yielding securities.

In other words, these are relatively safe, high yield income stocks for you to consider adding to your retirement or pre-retirement portfolio.

Table Of Contents

All stocks in this list have dividend yields above 5%, making them highly appealing in an environment of falling interest rates. Stocks were further screened based on a qualitative assessment of business model strength, competitive advantages, and debt levels. Lastly, stocks were filtered to ensure that no individual market sector can account for more than three selections on the list for diversification.

The 10 highest-yielding securities with Dividend Risk scores of C or better are listed in order by dividend yield, from lowest to highest.

10. Principal Financial Group (PFG)

  • Dividend Yield: 8.0%

Principal Financial Group is a financial corporation that operates several businesses including insurance, primarily life insurance, and investment management, retirement solutions and asset management. Principal Financial Group was founded in 1879.

Principal Financial Group reported its fourth-quarter earnings results on January 28. The company recorded revenues of $514 million for its retirement and income solutions fee business, which was 36% more than the fee revenues that were generated by the segment during the previous year’s period. Principal Financial Group saw its assets under management grow to $735 billion, which was a new record. This was possible thanks to positive net flows which totaled $6.9 billion during the fourth quarter.

A total of 87% of the company’s assets under management held a 4 or 5 star rating by Morningstar at the end of the fourth quarter, which shows the company’s high expertise in managing wealth for its clients. This was also reflected in the fact that 79% of assets outperformed their peer group over the last 5 years.

Principal Financial Group generated earnings-per-share of $1.41 during the fourth quarter, which slightly beat the consensus estimate. Earnings-per-share were up 27% compared to the earnings-per-share that were created during the previous year’s quarter. For all of 2020, Principal Financial Group managed to grow its earnings-per-share by 1%.

Principal has a modest growth trajectory in the years ahead. A rising number of new customers and strong market performance helps drive AUM. Separately, in its insurance business, Principal Financial Group has been able to grow its premiums and fees in the past as well, and a growing float that can be invested should result in rising investment income.

Principal Financial Group has also boosted its earnings-per-share growth by repurchasing shares in the past, and plans to do the same going forward. In February, the company authorized a new $900 million share repurchase program. Through these measures, the company should achieve mid-single-digit growth over the next five years.

The high dividend yield of 8% is backed by the company’s underlying earnings. With a projected dividend payout ratio below 40% for 2020, we view the dividend as secure barring a deep and prolonged recession.

9. Office Properties Income Trust (OPI)

  • Dividend Yield: 8.7%

Office Properties Income Trust is a REIT that currently owns 189 buildings, which are primarily leased to single tenants with high credit quality. The REIT’s portfolio currently has a 92.4% occupancy rate and an average building age of 17 years. It has a market capitalization of $1.2 billion.

On 12/31/2020, the predecessor company – Government Properties Income Trust – merged with Select Income REIT (SIR) and the combined company was renamed Office Properties Income Trust. The aggregate transaction value was $2.4 billion, including the assumption of $1.7 billion of debt from SIR. The combined company has enhanced geographic diversification and one of the highest percentages of rent paid by investment-grade rated tenants in the REIT universe.

The U.S. Government is the largest tenant of OPI, as it represents 39% of the annual rental income of the REIT. After acquiring First Potomac Realty Trust (FPO) in 2020 and merging with SIR, OPI is now in the process of selling assets to reduce its leverage to a healthy level. In 2020, it sold or agreed to sell nearly $1.0 billion of assets.

In mid-February, OPI reported (2/20/2020) financial results for the fourth quarter of fiscal 2020. During the quarter, the REIT completed 779,000 square feet of leasing at weighted average rents that were 4.2% above prior rents for the same space and posted funds from operations of $1.38 per unit, which exceeded analysts’ consensus by $0.03. For the year, occupancy rate improved from 91.0% to 92.4%.

Nevertheless, due to the extensive asset divestment program, we expect normalized funds from operations (FFO) per unit to decrease from $6.01 in 2020 to approximately $5.50 for 2020. Still, this is expected to sufficiently cover the annualized dividend payout of $2.20 per share, for a 2020 payout ratio of 40%.

OPI generates 63% of its annual rental income from investment-grade tenants. This is one of the highest percentages of rent paid by investment-grade tenants in the REIT sector. Moreover, U.S. Government tenants generate about 39% of total rental income and no other tenant accounts for more than 3% of annual income. This exceptional credit profile constitutes a meaningful competitive advantage.

On April 2nd, the company issued a press release maintaining its quarterly dividend rate, adding that it does not believe its financial results will be significantly impaired by the coronavirus outbreak. The company reiterated that it does not have significant debt maturities until 2022, and that it expects to maintain a dividend payout ratio of

75% for 2020, based on cash available for distributions.

8. Altria Group Inc. (MO)

  • Dividend Yield: 8.8%

Altria Group is a tobacco products giant. Its core tobacco business holds the flagship Marlboro cigarette brand. Altria also has non-smokable brands Skoal and Copenhagen chewing tobacco, Ste. Michelle wine, and owns a 10% investment stake in global beer giant Anheuser Busch Inbev (BUD).

Altria is a legendary dividend stock, because of its impressive history of steady increases. Altria has raised its dividend for 50 consecutive years, placing it on the very exclusive list of Dividend Kings.

In late January, Altria reported strong fourth-quarter earnings. Revenue (net of excise taxes) increased 0.3% for the fourth quarter, and 0.9% for 2020 as price increases more than offset volume declines. Adjusted earnings-per-share increased 7.4% for the fourth quarter.

For 2020, adjusted earnings-per-share increased 5.8% to $4.22, due to cost controls and share repurchases. Altria exceeded its target of $575 million in cost reductions. Separately, Altria took a non-cash impairment charge of $4.1 billion related to its investment in Juul, bringing total Juul-related charges to $8.6 billion for 2020.

Altria’s key challenge going forward will be to generate growth in an era of falling smoking rates. Consumers are increasingly giving up traditional cigarettes, which on the surface poses an existential threat to tobacco manufacturers. Altria expects cigarette volumes will continue to decline at a 4% to 6% annual rate through 2023.

For this reason, Altria has made significant investments in new categories, highlighted by the $13 billion purchase of a 35% stake in e-vapor giant JUUL. This acquisition gives Altria exposure to a high-growth category that is actively contributing to the decline in traditional cigarettes.

Altria also recently announced a $1.8 billion investment in Canadian marijuana producer Cronos Group. Altria purchased a 45% equity stake in the company, as well as a warrant to acquire an additional 10% ownership interest in Cronos Group at a price of C$19.00 per share, exercisable over four years from the closing date.

Altria reaffirmed its guidance for 2020 full-year adjusted diluted EPS to be in a range of $4.39 to $4.51, which would be 4% to 7% growth from 2020. The company also expects 4% to 7% annual adjusted EPS growth from 2020-2022.

Altria enjoys significant competitive advantages. It operates in a highly regulated industry, which significantly reduces the threat of new competitors entering the market. And, Altria’s products enjoy tremendous brand loyalty, as Marlboro controls more than 40% of U.S. retail market share.

Altria is also highly resistant to recessions. Cigarette and alcohol sales fare very well during recessions, which keeps Altria’s strong profitability and dividend growth intact. With a target dividend payout of 80%, Altria’s dividend is secure.

7. Prudential Financial (PRU)

  • Dividend Yield: 9.1%

Prudential Financial operates in the United States, Asia, Europe and Latin America, with more than $1.5 trillion in assets under management. The company provides financial products – including life insurance, annuities, retirement-related services, mutual funds and investment management. Prudential operates in four divisions: PGIM (formerly Prudential Investment Management), U.S. Workplace Solutions, U.S. Individual Solutions, and International Insurance.

On February 4th, 2020 Prudential released Q4 and full year 2020 results for the period ending December 31st, 2020. For the quarter Prudential reported net income of $1.128 billion ($2.76 per share) compared to $842 million ($1.99 per share) in Q4 2020. After-tax Adjusted Operating Income totaled $950 million ($2.33 per share) compared to $1.035 billion ($2.44 per share) in the year ago period.

For the year Prudential reported net income of $4.186 billion ($10.11 per share) compared to $4.074 billion ($9.50 per share) in 2020. After-tax Adjusted Operating Income equaled $4.845 billion ($11.69 per share) compared to $5.019 billion ($11.69 per share) in 2020. Adjusted book value per share totaled $101.04, against $96.06 in the year-ago quarter. At quarter-end Prudential held $1.551 trillion in assets under management compared to $1.377 trillion in Q4 2020.

In addition, Prudential declared a $1.10 quarterly dividend representing a 10.0% year-over-year increase. Due to the recent sell-off caused by coronavirus fears, Prudential’s yield now exceeds 9%. The dividend appears sustainable, with an expected dividend payout ratio of 35% for 2020.

While Prudential is highly profitable, it would be exposed to a severe global recession. During the last recession, Prudential generated earnings-per-share of $7.31 in 2007 followed by $2.69, $5.58 and $6.27 in 2008 through 2020. It wasn’t until 2020 that earnings finally eclipsed their pre-recession peak. Similarly, the dividend was slashed from $1.15 in 2007 down to $0.58 in 2008 and did not recover until 2020.

Still, the company has a reasonable payout ratio and financial position, but investors should note its performance during the last recession. If the U.S. enters a similarly devastating economic downturn, Prudential’s dividend payout could be at risk.

6. Marathon Petroleum Corp. (MPC)

  • Dividend Yield: 10.1%

Marathon Petroleum Corp. was spun off from Marathon Oil Corp. (MRO) in 2020. After the acquisition of Andeavor Logistics in October of 2020, MPC has become the largest U.S. refiner, with 16 refineries and a refining capacity of 3.1 million barrels per day.

It also has a marketing system that includes

6,800 branded locations,

3,900 convenience stores (

2740 are Speedway), and

1,000 direct dealer locations. In addition, MPC owns a midstream MLP, (MPLX), which has gathering and processing assets as well as pipelines for crude oil and light products.

In late January, Marathon Petroleum reported (1/29/20) financial results for the fourth quarter of fiscal 2020. Adjusted earnings-per-share fell -35% over last year’s quarter, primarily due to lower fuel margins in the retail segment. That was a notable change over previous quarters.

For the year, the retail segment grew its operating income by 54%, mostly thanks to the addition of the Andeavor retail network. In the year, MPC achieved $1.1 billion of synergies from the takeover of Andeavor and thus it exceeded its goal of $600 million by a wide margin. It also continues to aim for $1.4 billion of synergies by the end of 2021.

More importantly, activist investors, including Elliot Management, exerted pressure on MPC for structural changes in an attempt to unlock shareholder value. As a result, MPC will change its CEO and will spin off its Speedway gas station business, probably in the fourth quarter of this year. It will also form a special committee, which will examine ways to unlock value from the midstream business.

MPC greatly benefits from the inland location of some of the refineries of Andeavor. Thanks to the oil supply glut, these refineries buy their crude oil at a deep discount to WTI, so they enjoy high margins. Furthermore, U.S. refiners will greatly benefit from the new international marine rules, which have come into effect since January 1st, 2020.

Per these rules, vessels that sail in international waters are forced to burn diesel instead of heavy fuel oil. As the former is much more expensive than the latter, it should boost refiner earnings. MPC is properly positioned to benefit from the new marine rules. Thanks to a series of past investments, the refiner can upgrade about 600,000 barrels per day of low-value residue to diesel.

With an expected dividend payout ratio below 40% for 2020, MPC’s dividend appears to be secure. The stock has a high yield above 10%, making it an attractive choice for income investors.

5. Magellan Midstream Partners (MMP)

  • Dividend Yield: 11.3%

Magellan Midstream Partners has the longest pipeline system of refined products in the U.S., which is linked to nearly half of the total U.S. refining capacity. Its network of assets includes 9,700 miles of pipeline, 53 storage terminals, and 45 million barrels of storage capacity.

Refined products generate approximately 59% of its total operating income while crude oil and marine storage represents the remaining 41%. Magellan has a market capitalization above $6.6 billion.

In late January, MMP reported (1/30/20) financial results for the fourth quarter of fiscal 2020. Adjusted earnings-per-share and distributable cash flow increased 16% and 18%, respectively, primarily thanks to higher shipments of refined products and a higher average transportation rate. It was a record fourth quarter and full year for the earnings and distributable cash flow of MMP. Management provided guidance for 3% distribution growth in 2020 and distribution coverage of 1.25x.

Magellan’s extensive and diversified network of pipeline and storage assets is a significant competitive advantage. Another competitive advantage is its fee-based model in which the company generates fees based on volumes transported and stored and not on the underlying commodity price. This helps insulate Magellan from sharp declines in commodity prices. Only

10% of its operating income depends on commodity prices.

Magellan has promising growth prospects in the years ahead, as it has several growth projects under way. During the last decade, the company invested $5.4 billion in growth projects and acquisitions and has exhibited much better performance than the vast majority of MLPs.

The company will invest $400 million in these projects in 2020. It also has more than $500 million of potential growth projects under consideration and continues to evaluate their prospects in order to identify the most promising ones. It also announced it will sell 3 marine terminals to Buckeye Partners (BPL) for $250 million.

After the sale, the company intends to buy back up to $750 million of its own stock. This buyback could help boost future per-unit earnings and FFO growth.

Magellan has an excellent track record of steadily growing its distribution, and strong distribution safety. Magellan has increased its distribution 71 times since its initial public offering in 2001, including a recent 3% year-over-year increase. The company expects to maintain a distribution coverage ratio of at least 1.2x over the next several years, which will be sufficient to raise the payout each year. Magellan also has a strong debt profile, with a high credit rating of BBB+ from Standard & Poor’s.

Therefore, Magellan earns a high ranking on this list for its combination of a very high 11.3% yield, but also its strong credit rating and long history of distribution increases.

4. Enterprise Products Partners (EPD)

  • Dividend Yield: 11.7%

Enterprise Products Partners was founded in 1968. It operates as an oil and gas storage and transportation company. Enterprise Products has a tremendous asset base which consists of nearly 50,000 miles of natural gas, natural gas liquids, crude oil, and refined products pipelines. It also has storage capacity of more than 250 million barrels. These assets collect fees based on materials transported and stored.

In late January (1/30/20), Enterprise Products reported fourth-quarter and full-year 2020 financial results. Adjusted EBITDA increased 8.1% for the fourth quarter, and 12.4% for 2020 ($3.69 on a per-unit basis.) Distributable cash flow increased 1% for the fourth quarter, and 10.6% for the full year. Growth was fueled by volume increases and new assets placed in service.

In the fourth quarter, gross operating profits increased 17% in the NGL Pipelines & Services segment, and increased marginally in Crude Oil Pipelines & Services excluding non-cash items. Growth was somewhat offset by a 9.5% decline in Natural Gas Pipelines & Services, and an 8.2% decline in Petrochemical & Refined Products Services.

Enterprise has positive growth potential moving forward, thanks to new projects and exports.

For example, Enterprise Products has started construction of the Mentone cryogenic natural gas processing plant in Texas, which will have the capacity to process 300 million cubic feet per day of natural gas and extract more than 40,000 barrels per day of natural gas liquids. The facility is expected to begin service in the first quarter of 2020.

Enterprise Products is also developing the Shin Oak NGL Pipeline, which is scheduled to be placed into service next year. The Shin Oak NGL Pipeline is expected to have total capacity of 600,000 barrels per day. Exports are also a key growth catalyst. Demand for liquefied petroleum gas and liquefied natural gas, or LPG and LNG respectively, is growing at a high rate across the world, particularly in Asia.

In terms of safety, Enterprise Products Partners is one of the strongest midstream MLPs. It has credit ratings of BBB+ from Standard & Poor’s and Baa1 from Moody’s, which are higher ratings than most MLPs. It also had a high distribution coverage ratio of 1.7x for 2020, meaning the company generated approximately 70% more distributable cash flow than it needed for distributions last year.

Another attractive aspect of Enterprise Products is that it is a recession-resistant company. Enterprise Products’ high-quality assets generate strong cash flow, even in recessions. As a result, Enterprise Products has been able to raise its distribution to unitholders for 62 quarters in a row.

Like Magellan, Enterprise Products has a high credit rating of BBB+. In addition, it has world-class assets and a very long history of regular distribution increases. Combined with a high yield of 11.7%, Enterprise Products is built to outlast even a deep recession.

3. Invesco Ltd. (IVZ)

  • Dividend Yield: 14.1%

Invesco is a global investment management firm. It has more than 7,000 employees and serves customers in more than 150 countries. Invesco currently trades with a market capitalization of $4.0 billion and has over $1.1 trillion of assets under management (AUM).

In the 2020 fourth quarter, Invesco generated revenues of $1.27 billion, up 38.2% compared to the prior year’s quarter. Invesco’s revenue increase was primarily based on an increase in the company’s assets under management, to more than $1.2 trillion, with the majority of that AUM growth stemming from the Oppenheimer Funds acquisition.

Invesco saw long-term net outflows of $14 billion during the quarter, which offset some of the growth from the Oppenheimer Funds takeover. Earnings-per-share of $0.64 for the fourth quarter rose 45% year-over-year, again mainly from Oppenheimer.

For the year, adjusted net revenue increased 15.6% to $4.4 billion, while adjusted EPS increased 4.9% to $2.55.

Invesco’s future growth will depend largely on its recent acquisitions. Invesco acquired Oppenheimer Funds for

$5.7 billion. Acquiring Oppenheimer Funds grew Invesco into becoming the 6th-largest U.S. retail investment management company.

Separately, Invesco also acquired the ETF business from Guggenheim Investments for $1.2 billion. Invesco also made a significant investment in financial technology with its acquisition of Intelliflo, a leading technology platform for financial advisors that supports approximately 30% of all financial advisors in the U.K.

Share buybacks will also help boost earnings-per-share growth. During 2020, the company purchased $670 million of its common shares. Since it announced its $1.2 billion stock repurchase plan in October 2020, the company has repurchased $973 million of its common shares. It expects to utilize the remaining

$227 million by the first quarter of 2021.

Invesco ranks well in terms of dividend safety with an expected payout ratio of 48% for 2020. This should allow the company to maintain its dividend payout. Invesco also has a strong balance sheet, with a credit rating of BBB+ from Standard & Poor’s.

2. Kontoor Brands (KTB)

  • Dividend Yield: 14.8%

Kontoor Brands is an apparel company that focuses on what it calls “lifestyle apparel”. The company, which was spun off from V.F. Corporation (VFC) in 2020, owns some of the world’s most iconic denim brands, including Wrangler, Lee, and Rock & Republic. Kontoor Brands is a US-focused company; just 27% of its revenues are generated outside of the United States.

Kontoor Brands reported its fourth quarter financial results on March 5. The company reported that its revenue declined by 10.1% compared to the previous year’s quarter, to $653 million. Revenues came in $31 million lower than what the analyst community had forecasted. Kontoor Brands’ revenues were negatively impacted by its decision to close down non-profitable business lines, mainly in India, while currency rate movements also were a headwind.

Kontoor Brands’ earnings-per-share totaled $0.97 during the fourth quarter, beating the analyst consensus estimate by $0.05. Kontoor Brands’ lower revenue generation was partially offset by a higher average gross margin during the quarter. Kontoor Brands did have to deal with one-time expenses related to the closing of some businesses.

Beyond 2020, Kontoor Brands is likely to grow very slowly, due to the fact that its brands and products are inherently slow-growth, while the company also does not retain a large amount of earnings that could be spent on growth initiatives.

Management had previously forecasted revenue growth in the low-single-digits for 2020 and 2021, before reducing the guidance towards no growth more recently, based on the impact that the coronavirus will have on its operations. The further spread of the virus in the US and Europe since early March is why we believe that sales will actually be down this year, and earnings will, we believe, take a hit as well.

The company recently updated investors that it has drawn $475 million on its credit line to shore up its near-term financial position. Kontoor Brands stock has a very high dividend yield of nearly 15%. With a projected dividend payout ratio of 76%, the dividend payout could be at risk if earnings decline significantly, which is a likely scenario if a recession occurs. Therefore, investors should closely monitor the company’s financial results in the coming quarters.

1. Energy Transfer LP (ET)

  • Dividend Yield: 21.8%

Energy Transfer is a midstream oil and gas Master Limited Partnership, or MLP. Energy Transfer’s business model is storage and transportation of oil and gas. Its assets have total gathering capacity of nearly 13 million Btu/day of gas, and a transportation capacity of 22 million Btu/day of natural gas and over 4 million barrels per day of oil.

Energy Transfer’s diversified and fee-based assets provide the company with steady cash flow, even when oil and gas prices decline. As a midstream operator, Energy Transfer’s cash flow relies heavily upon volumes, and less so on commodity prices.

Energy Transfer reported solid fourth-quarter results in February. Adjusted EBITDA continued its streak of strong growth on the back of another record operating performance in the Partnership’s NGL and refined products segment, increasing 5% year-over-year to $2.81 billion. Distributable cash flow increased by 2% to $1.55 billion, reflecting improving cash flow generation efficiencies.

This led to $725 million in retained cash flow and a 1.88x distribution coverage ratio for the fourth quarter, which indicates the distribution is secure. The company has also effectively managed its balance sheet, with a credit agreement leverage ratio of 3.96x at the end of 2020.

The company is also making strong progress on several growth projects which should be adding to cash flows in the coming quarters and years. For example, in February Energy Transfer completed its seventh natural gas liquids (NGL) fractionation facility at Mont Belvieu, Texas. This brought total fractionation capacity at Mont Belvieu to over 900,000 barrels per day. The company is also progressing with plans on a Bakken pipeline optimization project, which is expected to start up in 2020.

Separately, the $5 billion acquisition of SemGroup Corp. will also fuel Energy Transfer’s growth. This will expand its natural gas liquids and crude oil capabilities with the addition of 18.2 million barrels of storage capacity. The gathering assets are in the DJ Basin in Colorado and the Anadarko Basin in Oklahoma and Kansas, as well as oil and NGL pipelines connecting the DJ and Anadarko basins with crude oil terminals in Oklahoma.

The company’s new projects will help secure its attractive distribution, which currently yields nearly 10%. Energy Transfer anticipates a distribution coverage ratio of

1.9x for 2020, which is better than average for an MLP. We believe Energy Transfer is capable of delivering distributable cash flow per share of around $2.20 for 2020. Energy Transfer has a very high yield and a secure payout, which makes it an attractive stock for income investors.

Energy Transfer trades for a price-to-cash flow ratio in the low single-digits, making it much cheaper than many other MLPs. In addition, it has an extremely high yield of 22%, which may signal a risk of a distribution cut. While the distribution appears secure at the present time, conditions are evolving rapidly in the energy sector and investors will need to have a high tolerance for risk to invest in this stock.

Final Thoughts

Interest rates are on the decline once again. After two years of the Federal Reserve raising rates, the central bank announced a recent interest rate reduction. Investors might scramble to search for suitable income in a low-rate environment, but these high-yield stocks are still presenting strong income generations ability.

The 10 stocks on this list have high yields above 5%. And importantly, these securities generally have better risk profiles than the average high-yield security. That said, a dividend is never guaranteed, and high-yield stocks are potentially at risk of dividend reductions or suspensions if a recession occurs in the near future. Investors should continue to monitor each stock to make sure their fundamentals and growth remain on track, particularly among stocks with 10%+ dividend yields.

Dividend Growth Investing 101

October 6, 2020 By M. Alden 42 Comments

Dividend Growth Investing is about purchasing dividend stocks that grow their dividends over time, and then holding onto those investments for quite a while as you receive continually increasing passive income from those companies.

Why this strategy? Because it gives you passive income that grows exponentially each year, and simultaneously builds your net worth over the long-term. Wealth is not simply about having a lot of assets, it’s about generating a significant amount of passive income that grows over time. Dividend Growth Investing works to build both your passive income and your net worth, can be more reliable than other investing methods, requires less time, and can be performed by anyone with sufficient discipline and basic math skills.

Dividend Growth Investing is not just about investing in stocks with a high dividend; it’s also about investing in companies that grow their dividends year after year. A passive income stream is typically unimpressive if it doesn’t grow. By investing in dividend growth companies, you’ll be building passive streams of income that grow over time. Each year with this investment strategy, assuming your companies stay healthy and profitable, your dividend passive income will increase. Better yet, unless you’re planning on living off of your dividends right now, you can reinvest your dividends to buy more dividend paying stocks to further increase your passive income. The growth is exponential, and the strategy works over a long period of time to build your wealth.

Companies that Pay Dividends

When a company makes a profit, they have several options for what they can use that money for. They can reinvest it to grow their business, save it for a rainy day or pay off debt, or send it to shareholders as dividends or share repurchases. Many companies use it for a combination of those things. Of the various public companies in existence, a significant subset of them pay regular cash dividends to shareholders. Regular dividends are cash payments that shareholders receive by simply holding the stock. Shareholders can then spend these dividends any way that they could spend any other form of cash income. It can be used as current income or it can be used to reinvest and buy more shares. The share can be held indefinitely, receiving income year after year.

Dividend Terms to Know

Dividend Yield

A share represents a portion of a company, and a dividend represents that shareholder’s portion of distributed earnings from that company. The dividend yield is equal to the annual dividends paid per share divided by the share price. For example, if I buy a share of a company for $50, and that share pays me a $2 cash dividend this year, then my dividend yield is 4%. Using the same math, if I spend $5,000 to buy 100 of those $50 shares, and those shares offer a dividend yield of 4%, then my annual dividends (passive cash income), will be $200.

Dividend Growth Rate

Dividend Growth Investing is not merely concerned with how much passive income your shares give you, but also how quickly that passive income grows. Many companies increase their dividend payments each year, meaning that each year’s passive income is larger than the year before it. Several companies have records of paying increasing dividends for 10, 25, or 50 consecutive years in a row and are still continuing with this trend. Some people look at a dividend yield and mistakenly assume this will be their total rate of return, but that is not the case. Dividend growth must be factored in as well. If a company pays $1 in dividends per share this year, $1.1 in dividends per share next year, $1.21 in dividends next year, then it is currently growing its dividend at a rate of 10% per year on average. If this continues for 30 years, then the company will be paying over $17 per year in dividends per share at that time! Exponential growth is enormously powerful.

Dividend Payout Ratio

The dividend payout ratio is the percentage of per-share earnings that are paid out as dividends each year. So if a company has earnings-per-share (EPS) of $3, and pays out $1 in dividends per share this year, then the payout ratio is approximately 33%. The company is paying out a third of its profit to shareholders as dividends, and keeping the other two-thirds of its profit for other purposes such as growing the business, making acquisitions, reducing debt levels, or repurchasing shares. It’s important to know the payout ratio because it gives you an idea of the growth prospects of the company, and lets you know whether the dividend is safe. If the company doesn’t have enough earnings to keep up with its dividend payments, it will have to reduce its dividend, and we certainly don’t want that.

The Math Behind Dividend Growth Investing

I’ll use a fictional company called Monk Mart Inc. as my example throughout this section. Monk Mart stock currently trades for $30 per share and has a price-to-earnings ratio (P/E) of 12. So, EPS this year is $2.50. Monk Mart currently has a payout ratio of 40%, so the company is paying out $1.00 in dividends to each shareholder this year. Using these numbers, it is calculated that Monk Mart’s dividend yield is 3.33%. Furthermore, Monk Mart currently has plans to increase the dividend by 8% annually by growing its business.

Monk Mart is a stock that increases its dividend approximately in line with its EPS. If the dividend grows by 8% each year, and the payout ratio remains 40% and the P/E remains 12, that means that the stock price will also increase by 8% each year. Of course, in reality, the stock price won’t increase at exactly the same pace as the dividend payments, because the payout ratio or P/E may fluctuate in times of bull markets and bear markets. To keep the calculations for reinvested dividends manageable, I’m going to assume that Monk Mart stock continually has a P/E of 12 and a payout ratio of 40%, along with 8% dividend growth.

In this scenario, I’m going to purchase 100 shares of Monk Mart stock for $30 each, for a total of $3,000. This means that I’ll receive $100 in dividend payments this year. My plan is to reinvest all of my dividends into buying more Monk Mart stock. I have the stock in a non-taxed retirement account, and my broker allows me to reinvest dividends to buy more shares (including fractions of shares) without charge. Let’s see how much much value my Monk Mart stock returns to me.

During year 1, I collect my $100 in dividend payments. I use them to purchase more shares, so at $30 per share I can purchase an additional 3.33 shares and now have a total of 103.33 shares of Monk Mart. My investment is now worth $3100.

During year 2, Monk Mart indeed raises its dividend by 8% from $1.00 per share to $1.08 per share, and because the P/E and payout ratio remained static, the stock price is now $32.40 per share. Since I receive $1.08 per share in dividends this year and have 103.33 shares, my total dividend income this year is $111.60, and I’ll use that money to buy more shares at $32.40 per share. So, I use my $111.60 to purchase 3.44 shares and now have 106.77 shares of Monk Mart. My investment is now worth $3459.35.

During year 3, Monk Mart again raises its dividend by 8% from $1.08 to $1.17 per share, and because the P/E and payout ratio remained static, the stock price is now $34.99 per share. Since I receive $1.17 per share in dividends this year and have 106.77 shares, my total dividend income this year is $124.92, and I’ll use that money to buy more shares at $34.99 per share. So I use my $124.92 to purchase 3.57 shares and now have 110.34 shares of Monk Mart. My investment is now worth $3860.80.

And so on. It may sound like a lot of work, but many brokers allow you to automatically reinvest your dividends leaving very little maintenance for the investor.

After 10 years, the investor owns 134 shares, the total investment is worth over $8,300, and the dividend income is more than $268/year.

After 20 years, the investor owns 186 shares, the total investment is worth over $22,300, and the dividend income is more than $804/year.

After 30 years, the investor owns 258 shares, the total investment is worth over $74,700, and the dividend income is more than $2,400/year.

After 40 years, the investor owns 359 shares, the total investment is worth over $224,000, and the dividend income is more than $7,200/year.

In this scenario, a mere $3,000 turned into more than $224,000 40 years later, and a mere $100 in annual dividend income turned into more than $7000. Both the investment worth and the passive dividend income grew at a rate of return of more than 11%. There will of course be inflation, so the money in the future will have less purchasing power than it does today, but it’s still a whole lot more money than there was to begin with. In addition, stocks are fairly inflation-resistant because a good company can pass the costs of inflation onto its customers. And, this large growth of money only represents a single investment. If the same investment of a few thousand dollars was made each year, then the investment worth would be worth millions by the end.

Notice again that the total rate of return of investment worth in this example was a little over 11% per year. If you add the dividend yield (3.33%) to the dividend growth rate (8%), you’ll get 11.33%, which is the approximate rate of return of this investment. It’s a good rule of thumb that all else being equal, the long-term dividend yield plus the long-term dividend growth rate is what you can expect in terms of total return. In reality, the P/E won’t stay static, and other factors will fluctuate. If you let this work against you, the return may be somewhat less than the yield plus the growth, but if you work it in your favor, the return may be somewhat more than the yield plus the growth.

A huge portion of the returns of this stock were due to dividends. If dividends were not reinvested, then instead of owning 371 shares at the end, the investor would still only own 100. Since each share was worth approximately $600 by the end, the investor would only have had an investment worth of approximately $60,000 rather than $224,000.

Passive Income Growth and Re-Investing

As previously mentioned, the goal of this investment approach is to simultaneously build passive income and a high net worth. A company has control over how much it pays in dividends, but the masses of the market are the ones that determine the stock price at any given time, so the company growth and the dividends they pay are the primary points of focus for dividend growth investors. Stock prices fluctuate all the time, going up and down, but a disciplined company can grow its dividend year after year without missing a beat for decades. It’s important to have a disciplined mindset, because in the real world even if a dividend-paying company provides long-term returns similar to those in my Monk Mart example, the growth will never be that smooth and the market will sometimes reduce the value of your investment. A dividend investor’s job is to pick good companies to invest in at reasonable stock valuations, with both money they put into their portfolio and money they receive as dividends.

To maximize investment returns, the investor should use the dividends they receive to purchase more shares, like with the earlier Monk Mart example. Consider the following chart, which displays a comparison between reinvesting and not reinvesting dividends in a given company. In the chart, two investors start out with $50,000 and keep the money invested for 40 years. The company that they invest in pays out a 3.33% dividend yield and grows its dividend at an 8% rate annually. One of the investors spends his dividends while the other investor reinvests her dividends to buy more shares.

Over time, the investor that reinvested dividends accumulated more shares of the company, so her investment worth increased at a higher rate. She ended up with over $3 million while the investor that did not reinvest dividends only ended up with $1 million.

Eventually, a person can live off of their dividends as current income rather than reinvesting them. If enough value is accumulated, the passive income will be high enough so that no shares ever have to be sold, and so the investor can live off of his or her accumulated wealth indefinitely while continuing to grow, rather than shrink, their net worth.

Characteristics of a Good Dividend Investment

Obviously, the dividend growth strategy takes time and discipline. We need to identify companies that will provide good returns over decades. No single investment must last for the entire span of the investor’s life, because the investor ideally has a diversified portfolio of several dividend-paying companies, but the better the investments perform over the long-term, the lower the turn-over rate of the portfolio needs to be. Some good selections might last throughout the entire span of the investor’s life.

There is no set formula for finding a good dividend growth stock for your portfolio. I leave formulas for the technical speculators. There are, however, general principles that are worth looking for in investments.

-A good dividend growth company has a product or service that you can foresee existing and being relevant for many decades to come. Time is very important to allow passive income to increase, so it’s wise to find a company that is built to last forever.

-The company should have unique aspects that separate it from competitors.

-A strong balance sheet is the hallmark of a good dividend investment, because it increases the chances of your company being able to survive and grow.

-Keep in mind the general estimation that the total rate of return will be equal to the dividend yield plus the sustained dividend growth rate. Some investors like high-yielding stocks with lower dividend growth while others like lower-yielding stocks with higher dividend growth, and some prefer a mix of both, but keep this basic guideline in mind.

-The company’s stock should be reasonably priced. A good company can make a bad stock if it is over-priced relative to its fundamental value. If you buy stock in an overvalued company, your returns are likely to be less than the sum of dividend yield and dividend growth. If, instead, you buy quality undervalued companies, your returns may be greater than the sum of dividend yield and dividend growth.

-You should be able to understand the company. My view of investing is about individuals taking control of their finances, so if they don’t really understand their stocks, they aren’t really taking control of their finances.

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Reader Interactions


Good post, especially the graphs about reinvested dividends and the importance of growing dividends.

I wrote a post about reinvested dividends a couple of days ago but your graphs are much clearer. Here we can visually see the difference between the alternatives.

Is it ok if I quote two sections from this post into my article? I will of course mention your name.

Dividend growth investing is one of the best strategies for investing. About half my portfolio contains stocks like this. Even better, if you took advantage of the cheap prices recently. You could have bought excellent companies like Conoco Phillips and got a yield of over 5% plus this company has a solid history of raising their dividend…in fact they did so just recently. If compound interest is the 8th wonder of the world, then dividend growth investing is the 9th, I’m a solid believer in it. Great post Dividend Monk!

You may or may not know, I follow your site, but do not leave many comments. I do however, feel compelled today to leave one after reading this post. AMAZING work!

My Own Advisor

Thanks for the positive feedback. I spent a good deal of time on this post and have had it sitting in my drafts section for weeks now, and I intend to put it on the “start here” section as a core article for the site. I plan to update it and improve it as necessary.

Yes, please feel free to quote whatever you wish to.

I stopped by after following the comment you left on my site, and I agree, this is amazing work. A dividend-based approach to investing can definitely be a core component of an infinite portfolio. I love the graphs as well; you did them with Google Spreadsheet? They are really nice; much better than what you get with Excel or OpenOffice.

As some food for thought, have you compared and contrasted dividend investing as opposed to capital growth? Why would selling shares be a bad thing if you were selling an amount in dollar terms equivalent to the amount of dividends that you would be collecting? If the overall rate of return were the same, wouldn’t not reinvesting dividends be the same thing as selling shares in a stock or index that reinvests this cash internally? Have you written about this? I’d be interested in reading more.

Invest it Wisely,

Yes, I did the graphs with Google spreadsheet. They’re really handy, but the ability to customize them is significantly less than Excel. I’ve never used Open Office so I can’t compare there.

Over the long-term, dividend-paying stocks have been shown to outperform non-dividend paying stocks on average. Of course there are exceptions, so a diversified portfolio is necessary. This is because most companies can only invest so much money into growth until more money won’t help much that year, so it ends up being wasted on poor projects. Selling stocks of a dividend-paying company isn’t helpful unless you no longer consider that investment to be worthwhile, because as you hold onto the stocks, capital appreciation should occur as long as things are going well. The more portfolio turnover there is, the more that is lost to taxes.

It’s true that, for example, if a dividend-paying company has 8% growth and a 3% yield while another company has 11% growth over the same period, the returns of the companies will be comparable. But, often this is not the case, and a dividend paying company ends up growing just as well as the one that wastes its money on other things. Its dividend, then, ends up being crucial to its out-performance.

Hate to be such a “Dividend Monk Fanboy,” Matt, but this was quite possibly the best post I’ve ever come across on the subject. It’s written very clearly and is laid out in a simple, easy-to-understand way.

Again, keep up the good work!

Thanks Pey, I appreciate your continued readership.

This is also my first time visiting your blog, and like the other readers, I’m very impressed.

I do have one thought about reinvested dividends vs money being allocated internally. If a company has proven that it can average a high return on total capital within the majority of its business operations(averaging, say, 15%+ per year for many years) then the company can reinvest what would be dividends, and thus save the shareholder tax. I’ve read two very interesting books on this: Jeremy Siegel’s book, The Future for Investors, where his philosophy is in line with yours. And then I read a book by Brian McNiven, called A Great Company at a Fair Price.
Siegel, as great as his book is, ignores taxable consequences of dividends. And as Buffett has said, dividends are taxed twice: once at the corporate level and again at the personal level. Even when reinvested (if it’s a taxable account) the taxable liability still takes a hefty chunk.
McNiven’s philosophy opposes Sielgel’s. He suggests that if the company is purchased at a fair price (and not a dumb price) then the company with the higher rate of return on capital can utilize that money much more effectively, and as such, the company’s share price will grow faster than it will with the higher dividend paying business. And that share price grows capital gains free until sold.
Buffett himself leans more towards non dividend payers–but there’s a twist.
We know that Warren Buffett’s Berkshire Hathaway hasn’t paid a dividend in more than 30 years because Buffett feels that the return on capital that he generates by retaining those earnings will create eventual share price appreciation value for the shareholder that will exceed the share price/dividend capital appreciation that his shareholders would receive. In his view, paying out a dividend and then reinvesting it back into the business (reinvesting the dividend) does virtually the same thing, but the shareholder holds on to the tax bill in the process.
The other thing Buffett mentions, however, is probably the key that separates a Warren Buffett from a guy like me. First of all, now that Berkshire is so huge, he has to buy many large companies that pay dividends. But he prefers smaller businesses that effectively retain their earnings. But he just can’t buy those anymore. They don’t move Berkshire’s needle.
A guy like Buffett can look at the return on total capital and determine whether all of the money is reinvested in parts of the business with high returns. Investors like me would just see the average return on capital, suggest that it’s high, and figure that the business is more efficient as a non dividend (or low dividend) payer. Meanwhile, the business could be wasting money, as you alluded to in your comment to Kevin. In Buffett’s 1983 letter to shareholder’s he said, “Shareholders are better off only if earnings are retained to expand the high-return business…Managers of high return businesses who consistently emply much of the cash thrown off by those businesses in other ventures with low returns should be held to account for those allocation decisions” That was a nice way of say, “they should be fired”

Kevin, if I’m reading you correctly, you’re curious about whether the investment should be sold—in pieces equivalent to what the investor would receive from dividends. Doing so might negate the power of those compounding dividends, throwing off more dividends as new shares are purchased. But I don’t really have an answer.

Great post – lots of good analysis and data in there. New income investors are often drawn to high yields like moths to the flame without considering why those trailing yields are showing so high. It’s generally better (and safer) to target dividend growth over current yield.

That’s quite a comment!

I agree that in a rare case where a business truly can utilize all of its cash effectively, a dividend is not necessary. Buffett certainly meets that criteria. The thing with Berkshire, though, is that it’s a conglomerate that can buy pretty much whatever it wants. It has an effectively unlimited number of places to allocate capital, and with Buffett at the top, that’s a fantastic combination.

Most businesses are confined to a certain niche, with finite opportunities. Most businesses don’t do well by “empire building”, that is, growing simply for the sake of growing without a focus on total shareholder returns. The majority of companies out there would do well to pay a dividend.

Tax consequences are important, but it’s also true that many holdings are held in tax-free accounts amassed in retirement accounts in various countries.

Lastly, by not paying dividends, shareholder returns are entirely due to stock market price, which is continually set by the whim of the market. Dividends allow shareholders to make a decision, with their own personal circumstances in mind, about how they want to allocate this part of their capital. They can reinvest them, spend them, invest them in another company, put them into a different type of asset, etc. It’s an additional tool to deal with a variety of market conditions. Personally, I let my dividends pool together and then decide where I’m going to allocate them, along with fresh capital to my portfolio.

Thanks for stopping by. I agree with what you’ve said. Although I enjoy finding attractive high-yield investments from time to time, I find that attractive moderate-yield investments tend to come along more often.

Great explanation and graphs of dividend reinvesting. Using your example of Monk Mart, the dividends are steady and growing year to year. However the share price (and therefore dividend yield) may fluctuate depending on investor psychology. Reinvesting the dividend in each company will be a from of dollar cost averaging which is an advantageous tactic. However, what if the dividends were collected among all the investments in a portfolio and reinvested in those companies whose share price is transiently lower to maximize the total return?

That’s how I do it, personally. I collect all of my dividends in a pool and invest them where I find good deals.


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How to Invest in Stocks – Stock Investing 101 – TheStreet

A Beginner’s Guide to Stock Investing

Common stock gives shareholders voting rights but no guarantee of dividend payments. Preferred stocks provides no voting rights but usually guarantees a dividend payment.

In the past, shareholders received a paper stock certificate — called a security — verifying the number of shares they owned. Today, share ownership is usually recorded electronically, and the shares are held in street name by your brokerage firm.

Investing in stocks can be tricky business. In fact, it’s best to treat all of your investment pursuits as a business. Heck, that’s what Benjamin Graham (Warren Buffett’s stock market mentor) recommended.

Before you buy your first stock, you should master the basics of stock investing. This won’t make you a great investor overnight, but only when you understand the fundamentals of investing can you learn how to invest in stocks with confidence .

If you found this content useful, please share it. This will help us create more educational guides for investors.

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