Something amazing happens when a company grows its dividend
payout by 10% a year.
First off, we get 10% more in dividend payments each year -
that's obvious. And secondly, we can reasonably expect that
over the long term, the stock price will go up by about 10% per
This means that the current yield stays the same, since the
stock price moves higher with the dividend.
But earlier this month, we had to sell McCormick & Co. (
) in our
High Yield Wealth
portfolio because grew at a faster pace than the dividend.
McCormick sells a variety of spices and condiments - some of
which are likely in your spice rack, if not in the food you buy
from the supermarket. Like many of the best dividend
stocks, this company is pretty straightforward and relatively
I first recommended the stock back in June 2011, when shares
traded at $48 - selling for just 19X earnings.
At the time, McCormick paid a quarterly dividend of $0.28. And
the yield was 2.3%.
What happened with McCormick was that the dividend went up by
20% in two years, but the stock price went up by 40%.
McCormick isn't trading at 19x EPS anymore. It's trading
at 24x EPS. And at that valuation, the stock is richly
priced relative to the company's growth rate, the market in
general, and its historical valuation.
While McCormick will likely continue to grow its dividend for
years to come, the share price today is too rich. Today, the
downside of seeing our capital gains erode outweighs the upside
of further dividend growth.
So it's best to lock in our profits at a rich valuation, and
find a new dividend grower that is reasonably priced.
Even good companies, and good dividend payers, can be over
valued. When they are considerably overvalued, it's time to
sell. I would love to buy McCormick at 19x EPS again.
And when the stock trades there, pays a 3% yield, and is
growing the dividend at 10% per year, we'll buy it again.
The story of McCormick highlights the reason why every income
investor must focus on dividend growth. Good things happen when
you buy a dividend grower - and sometimes the market gives you a
chance to book a substantial gain.
Since my recommendation, shares are up 42%. Adding in the
dividends collected, the total gain on this dividend grower was
an impressive 48%.
McCormick is in a selective group of companies that have
outperformed over the long-term. These companies are known as
dividend growers. They raise their dividend payments year after
year, rewarding their shareholders with an ever-growing portion
of the profits.
The evidence for investing in dividend growers is
considerable. Over the past 30 years, S&P 500 stocks that
grew their dividends easily beat the performance of every other
class of stocks. The companies that are committed to increasing
their dividends did better than high yield stocks, better than
dividend payers in general, and better than non-dividend
30 Years of Outperformance
The long-term evidence is considerable.
now may be the best time to invest in dividend
That's because renowned research firm Ned Davis found that
dividend growers significantly outperform when interest rates are
In a three-year period after an interest rate hike by Fed,
dividend growers gain nearly 40%. Meanwhile, dividend payers as a
whole gained roughly 15%.
Dividend Growers Are Best Performers
With stocks up so much in the last year, finding value is a
top concern of mine. And now isn't a great time to own richly
priced stocks like McCormick.
Instead, it's time to find reasonably priced stocks that have
a track record of sharing the profits with investors, and a
history of increasing the size of those payments year after year.
High yields alone aren't enough to grow your wealth for the
I want to hear about your favorite dividend growers.
Drop me an email at email@example.com, and I'll
evaluate some of your ideas in an upcoming issue of
Income & Prosperity.