It's one of the most overlooked aspects of income investing. In
fact, I'm willing to bet that the majority of income investors
don't even consider it when they're buying adividend stock.
That's a shame because what I'm about to tell you could be the
most important quality of a successful income investment.
You see... when buying a dividend-paying stock, most investors
focus only on the company'scurrent yield . That makes sense. With
interest rates near zero and traditional income investments like
Treasurybonds yielding next to nothing, any stock that pays an
above-averagedividend yield is going to seem attractive.
But if you're only looking at a stock's current yield, then you
could be missing out on some of themarket 's greatest
opportunities. That's becauseyield isn't the only key to a good
income investment... You also need to consider a company's dividend
growth.
Dividend growth can turn lower-yielding stocks into big income
producers over time.
Don't believe me? Consider this...
Darden Restaurants (NYSE:
DRI
)
-- the popular restaurant operator that owns brands, such as Olive
Garden and The Red Lobster -- is currently paying an annual
dividend of $2 a share. At today's closing price of $56.04, that
means the stock is paying a 3.6% dividend.
In this market, a 3.6% yield isn't bad... Especially with the
average yield on the S&P 500 hovering around 2%... But it's not
spectacular by any means. It probably wouldn't garner a second look
from most income investors.
But when you take the stock's dividend growth into consideration,
there's clearly more to the story. In the past decade, Darden has
increased its quarterly dividend from 4 cents per share back in
2002 to 50 cents per share today -- a 1,150% increase in just 10
years.
If you had bought the stock a decade ago when it was trading around
$18 per share, youryield on cost (the current dividend yield based
on theoriginal cost of your investment) would be 11.1% annually.
Now I know a 1,000% dividend increase might seem like a one-off
occurrence. And to some extent it is... Not many companies can
afford a dividend hike of that magnitude. But as you'll see in a
moment, I've identified several other stocks with quadruple-digit
dividend growth.
The list below includes six other stocks -- all of which are
members of the S&P 500 -- that have boosted their payouts by
more than 1,000% in the past decade.
Ten years ago, income investors wouldn't have given these stocks
a second look. Their yields were too low to even be considered. But
had you bought them a decade ago and held on to theshares , each of
these stocks would nowoffer an attractive yield on cost.
Buying stocks that increase dividends allows you to take advantage
of the single most powerful tool in finance --compounding . Thanks
to compounding, low-yielding stocks can turn into big income
producers over the long-run.
However, it's important to remember that these are unusual
examples. Not every income stock is going to increase its dividend
by 1,000% during the next 10 years.
But it just goes to show you that current dividend yields are
really only part of the equation. Don't dismiss a stock just
because it pays a low yield right now. Otherwise you could miss out
on one of the best income investments of the next decade.
-- Paul Tracy
[Note: If you're interested in dividend growth, you need to
learn more about my "WGB Retirement Fund." The 12 stocks that make
up this "fund" have seen dividend increases of 21% in the past
year... 85% in four years... and even one that stock that's
increased payments every year for half a century. Maybe that's why
some of America's largest pension funds own millions of dollars
worth of these stocks. To learn more about these stocks --
including several names and ticker symbols -- follow this
link.]
Paul Tracy does not personally hold positions in any securities
mentioned in this article. StreetAuthority LLC does not hold
positions in any securities mentioned in this article.