[Editor's note: In honor of the New Year, we at
StreetAuthority thought it might be worth looking back at some of
our most popular articles of 2012. This article was originally
published on Nov. 22.]
More often than not, many investors make the mistake of looking
for the highest yielding stocks when it comes to building
Instead, it's important to remember that growth in thedividend ,
rather thanyield alone, creates the reliable, improving income
stream necessary for a comfortable retirement. Dividend growth
counts even more than yield because of the magic ofcompounding ,
which can turn today's modest yielder into a superstar performer as
dividends build year after year.
is a great example of what the power of compounding can do to a
stock's yield. In the past 10 years, Colgate has grown its dividend
roughly 12% a year. While Colgateshares yield close to 2% today,
the yield on the originalinvestment quickly climbs if dividends
keep growing at a 12% annual pace.
Take a look at the table below to see what I'm talking about.
This example assumes you purchase 100 Colgate shares at Sept. 19's
$106 share price.
The Power of Compounding at Work
1. Johnson & Johnson
Johnson & Johnson is the world's sixth-largest consumer
health care company and owns popular over-the-counter brands
such as Motrin, Tylenol, Benadryl and Mylanta. This health
care titan holds the No.1 or No. 2 position in many of its
markets, has a mammoth $193 billionmarket valuation and 50
consecutive years of dividend growth.
Johnson & Johnson'searnings per share have grown 10.6%
a year in the past decade and dividends have expanded at a
generous 12.2% annual rate. The company has phenomenal
financial strength as well. Thecash balance exceeds $16.9
billion,long-term debt is only $11.5 billion and trailingcash
flow from the past 12 months is more than $15.6 billion.
Payout of the dividend from cash flow is conservative at
43% and prospects for continued dividend growth are
excellent, based on Johnson & Johnson's robust research
pipeline, which includes potential new drugs for Alzheimer's
disease, stroke prevention and antibiotic-resistant
The Coca-Cola Co. (NYSE:KO )
Coca-Cola is the world's largest beverage company and has
what is arguably the world's most valuable brand. The value
of the Coke brand is estimated at roughly $72 billion. In
addition, Coca-Cola owns several other multi-billion dollar
beverage brands, such as Fanta, Sprite, Diet Coke and Minute
Maid. Ratings agency Standards & Poor's recently upgraded
the company'scredit rating from "A+" to "AA-" because of the
stock's emerging-market performance strength.
Coca-Cola has delivered 10.1% yearly dividend growth and
9.2% annual earnings-per-share growth in the past decade. The
company is committed to doubling the size of its business
during the next 10 years through a strategy focused on
acquisitions, product line extensions, partnerships and
Coca-Cola has a stockmarket value exceeding $167 billion
and more cash than long-term debt. Cash flow exceeds $9
billion a year and provides better than two-fold coverage of
the dividend. The company announced its 50th consecutive
annual dividend hike last February when the company increased
the payment 9% to a $1.02 annual rate currently yielding just
3. Walgreen Co.
Walgreen operates 8,000 retail stores in the United States
and Puerto Rico, fills more than 800 million prescriptions a
year and is America's leading drug store chain. The
recentacquisition of a majority stake in Alliance Boot,
Europe's leading pharmacy chain,will reposition Walgreen as
the world's largest drug store chain with 11,000 retail
stores worldwide. Another positive development is the
resolution of Walgreen's contract dispute with
Express Scripts (Nasdaq: ESRX)
last month, which should set the stage for revived same-store
Walgreen has raised dividends 37 years in a row and grown
the dividend amount at a 19% annual rate in the past 10
years. The latest dividend hike was 22.5% in June to a $1.10
annual rate, giving the shares a nearly 3% yield.
Walgreen increased earnings per share 14% a year between
2001 and 2008, posted a 7% earnings decline in 2009, but has
since rebounded strongly with earnings per share growth
growing 38% last year. With $2 billion of cash, just $2.4
billion of debt and dividend payout at only 31% of earnings,
Walgreen has plenty of cushion for more dividend growth.
4. Proctor & Gamble
Proctor & Gamble is the world's largest and most
profitable consumer packaged-goods company. This global giant
generates $84 billion in annual sales and owns 25 brands with
sales that exceed a billion dollars a year. This includes
familiar names such as Tide, Bounty, Pampers, Olay, Crest and
Pantene. Proctor & Gamble has three times as many
billion-dollar brands as its next largest competitor, and
more than most of its remaining competitors combined.
P&G has delivered 12.4% annual earnings growth and
10.9% dividend growth per year in the past 10 years and is
one of only six public companies that can claim 56 straight
years of dividend growth. The company expects future growth
to come from stepping upinvestments in its most profitable
businesses and in high-growthemerging markets .
Proctor & Gamble has a conservativebalance sheet ,
with long-term debt of $21 billion representing roughly 33%
ofequity . The company generates cash flow exceeding $13
billion a year. Dividend payout is a bit high, but still very
manageable, at 46% of cash flow. Proctor & Gamble hiked
its dividend 7% in April to a $2.25 annual rate. These shares
yield just over 3%.
Cash Balance: $52 billion
Exxon Mobil is the world's largest integrated oil and gas
company. The company has proven energy reserves of 24.9
billion barrels, consisting of a nearly 50/50 mix of oil and
Exxon Mobil produces about 2.2 million barrels of oil a
day and replaced 116% of its production from new reserves
last year. The company has diversified operations around the
world and plans to invest $185 billion during the next five
years in developing new energy supplies, including 22 major
projects scheduled for start-up between now and 2014.
Exxon Mobil has a 30-year record of consistent dividend
growth and has raised its dividend by 7.4% a year in the past
10 years. Earnings per share growth has been even more
impressive, averaging more than 20% a year over the same
period. The company rewarded shareholders with a generous 21%
dividend hike in April. The new annual rate of $2.28 gives
shares a yield of about 2.5%.
Exxon Mobil has more cash than debt ($18 billion vs $8.9
billion). In addition, the company's cash flow generation is
phenomenal, exceeding $55 billion a year, and dividend payout
is exceedingly modest at just 21% of earnings. The size of
dividend increases has accelerated in recent years, and
steadily rising energy prices could push Exxon Mobil
dividends even higher.
Action to Take -->
Although none of these yields will knock your socks off, it doesn't
get much safer than this. All five of these companies are leaders
in their industries and have incredible track records of consistent
dividend growth. In fact, some of them are mentioned in Paul
Tracy's special presentation,
The 10 Best Stocks to Hold Forever
, which you can access here.
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