More dividends or less dividends? I'd guess that the vast
majority of income investors would prefer "more".
I would also bet that most income investors want more
dividends now. They buy investments with high current yields,
with little thought to tomorrow's yield.
But that's the wrong approach. And I'll explain why.
You see, "cost basis yield" is far more important than a
stock's current yield. Over time, cost-basis yield is much more
important, because cost-basis yield most accurately reflects your
income and wealth position.
This isn't to say you should avoid investing in high yield
stocks. But if your choice is between a 6% yield and a 2% yield,
the 6% yield isn't always the best choice. You should be much
more concerned on where your yield will be over time.
If a stock yields 6% and pays the same dividend year after
year, your cost basis will remain 6%. But a stock that yields 2%
today and hikes the dividend payout annually, your cost-basis
yield will eventually far exceed the 2% current yield - and even
the 6% dividend stock.
McDonald's Corp (
Superior Uniform Group (
serve as insightful contrasts.
During 2001, you could have bought McDonald's for $25 a share.
That stock would have provided a yield of less than 1% at the
time. Alternatively, you could have bought a share of a Superior
Uniform for $9. Superior's $0.54 annual dividend provided a 6%
Through 2013, Superior has continually paid its dividend at
the annual rate of $0.54 a share. So the cost-basis yield would
have remained 6% over the last dozen years. Superior Uniform is a
consistent dividend payer, but it's not a dividend
McDonald's, on the other hand, is a prodigious dividend
Today McDonald's pays a $3.12 dividend. Continual
year-over-year dividend increases would have lifted the
cost-basis yield up to 12.5% - more than doubled Superior
A $1,000 investment would have bought 40 McDonald's shares.
The same investment in Superior Uniform would have bought 111
shares. From 2002 through this year, a $1,000 investment in
McDonald's resulted in $752 of dividend payments. Meanwhile, the
same investment in Superior Uniform delivered dividends of
That difference appears negligible. But as the years pass, the
annual cash-flow difference has become more pronounced. For
example, that hypothetical investment in McDonalds will pay $124
in dividends this year compared with $60 from Superior Uniform.
And the dividend spread between the two will continue to grow as
The difference in wealth effect is even more pronounced.
A share of Superior Uniform traded for $9 in 2001. Today that
same share trades for $12.60. As for that $25 McDonald's share,
that's worth $97 today.
I'm not just speaking theory here. I've experienced this
dividend-growth phenomenon firsthand. We added McDonald's to the
High Yield Wealth
portfolio in January 2011. The current yield and our cost basis
yield at the time were 3% - nothing exciting - based on our
$75.17 per-share recommendation price.
Thanks to annual dividend increases, our cost-basis yield has
risen to 4.3%. Our investment is now worth $97 a share. Keep in
mind, McDonald's current yield consistently holds near
In the October 2013 edition of
High Yield Wealth
, I'm introducing a new investment with the potential to grow
dividends at an even greater rate than McDonald's. A couple years
from now, this investment should have a cost-basis yield that far
exceeds today's current yield. What's more, investors should
expect this investment to mimic McDonald's wealth-producing