Suppose you were a job hunter
presented with two options: a position offering a flat $50,000
per year with no pay hikes, or one starting at $40,000 with a
guaranteed +10% raise each year.
If you were only a year away from retirement, then the first
option would make more sense. But for those a bit further away
from the finish line, then door number two would clearly be the
better deal. Not only will your paycheck grow each year, but it
will do so by an increasing amount -- $4,000 after the first 12
months, $4,400 after the next 12, and so on.
After just five years, you would be pulling down about $64,000
per year. And if the compensation alone didn't sway you, what if
I also mentioned that the first job offer was from a troubled
company with a 50/50 chance of laying off part of its workforce?
I'm guessing that would only reinforce your decision.
If this simple analogy makes sense, congratulations -- you're
already a step ahead of the yield-hungry crowd and that much
closer to financial independence.
First Impressions can be Deceiving
If you haven't guessed, this exercise is one that investors face
all the time: Do you choose the juicy (but static) 7% yield, or
the modest (but faster growing) 4% payout?
The immediate gratification of a higher current yield can be
tempting, no doubt. Plus, it's easy to live in the moment and
not worry about tomorrow -- that's why we had a national savings
rate near zero before the downturn. But as we saw in the
scenario above, it pays to think ahead -- sustained dividend
growth of +10% or better can ultimately put far more cash in
your pocket over the long haul.
I needn't remind you that
buying stocks based strictly on current yield is usually an
unwise idea -- like judging books by their covers. Just ask
anyone who was lured by the rich, but untenable double-digit
payouts of companies like Citigroup (NYSE: C) or General
Electric (NYSE: GE).
Instead, your time would be much better spent evaluating
where future distributions are headed -- based on historical
patterns, stated dividend policy, cash flow projections,
payout ratios and other key factors. After all, one
quarter's dividend isn't nearly as important as the
cumulative income that will be thrown off over the next five
years.
Take Hasbro (NYSE: HAS), for example. The toy maker bottomed
out with the rest of the market in October 2002, falling to
$9.87 per share. At that point, the company was paying out
quarterly dividends of $0.03 per share -- for a pedestrian
yield of 1.2%. You can bet that many income seekers scoffed
at that rate and didn't give the stock a second glance.
However, forward-looking investors saw a very different
story unfolding. Strategic initiatives implemented two years
earlier had just erased $684 million in debt and left the
firm with nearly $500 million in cash. At the same time,
investments made on the product development front were
beginning to pay off -- core brands like GI Joe,
Transformers and Playskool were all seeing strong momentum.
With a healthier balance sheet and optimistic earnings
outlook, it seemed that Hasbro could afford to be far more
generous. And just a few months later, management doubled
the firm's distributions to $0.06 per share. As you can see
from the graph below, they have done nothing but rise ever
since.
|
Year |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
| Dividends |
$0.12 |
$0.12 |
$0.21 |
$0.33 |
$0.45 |
$0.60 |
$0.76 |
$0.80 |
Through all the market's bends
and twists, Hasbro shareholders have seen their dividends
grow more than six-fold. Thanks to that impressive +30%
annual growth rate, the company is currently making yearly
payments of $0.80 per share.
So investors that looked past the meager 1.2% yield and
bought the shares in October 2002 are now raking in a
sizeable +8.1% on their original investment ($0.80/$9.87).
Making your Money Work for You
It's easy to see how dividend growers like Hasbro (hardly an
isolated example) can greatly enrich their owners over time.
The company has dished out cumulative dividends of $3.00 per
share since 2002, so an investor who picked up 1,000 shares
would have collected a cool $3,000 so far. But keep in mind
that all that cash could have been reinvested in more
shares, which would throw off dividends of their own, which
could then be reinvested in more shares, and so on...
For the sake of simplicity, if we assume the $3,000 was
reinvested at an average price of $17.50, the proceeds would
have paid for another 170 shares. And today, the stake of
1,170 shares would be generating an income stream of $936
per year -- representing a yield of about 9.4% on the
initial outlay.
Even if future growth slacks off dramatically, we'll still
be looking at double-digit territory in a year or two. I
should also point out that in addition to all those
quarterly payments, the shares themselves have climbed from
below $10.00 to $25.80 -- a gain of more than +160%.
If you crave 10% or better rates, you don't need to roll the
dice on a speculative REIT or mortgage lender -- you just
need to be patient. The companies below might not have
stratospheric yields today, but investors that stand behind
them should be showered with heavier and heavier payments
over the next few years.
|
Company |
Annual
Distribution |
Current Yield |
5-Year
Dividend CAGR |
Price |
Fair Value |
PAP |
| Caterpillar (NYSE: CAT) |
$1.68 |
4.7% |
+18% |
$36.66 |
$61 |
+66% |
| Home
Depot (NYSE: HD) |
$0.90 |
3.8% |
+21% |
$24.37 |
$38 |
+56% |
| Federated Inv. (NYSE: FII) |
$0.96 |
4.2% |
+19% |
$25.79 |
$39 |
+51% |
| Magellan
Midstream (NYSE: MMP) |
$2.84 |
8.4% |
+11% |
$35.19 |
$48 |
+36% |
| Burlington Northern (NYSE: BNI) |
$1.60 |
2.3% |
+22% |
$75.37 |
$94 |
+24% |
| Procter
& Gamble (NYSE: PG) |
$1.76 |
3.4% |
+12% |
$53.81 |
$67 |
+24% |
Now, out of the list of picks
above, one in particular stands out to me for the most
potential. In fact, I just added this pick to the "Yield
Doublers" portfolio of my Half-Priced Stocks advisory
12 days ago.
It's my ninth
addition to this unique portfolio since its inception less
than four
months ago. To see how the other eight "Yield Doublers" have
fared since I've recommended my readers to buy, check out the table below...
|
Company/Industry |
Recent
Price |
Effective Yield |
Total
Return |
Fair
Value |
Expected Appreciation |
|
Beverage Company
|
$54.84 |
5.6% |
+31.2% |
$103 |
+88% |
|
Telecom Operator |
$12.65 |
11.1% |
+144.2% |
$33 |
+161% |
|
Retail REIT |
$16.31 |
10.1% |
+63.9% |
$32 |
+96% |
|
Oil & Gas Refiner |
$27.40 |
9.4% |
+46.7% |
$44 |
+61% |
|
Energy Distributor
|
$45.63 |
5.0% |
+22.3% |
$87 |
+91% |
|
Food Manufacturer |
$26.81 |
5.0% |
+15.2% |
$34 |
+27% |
|
Banker |
$35.02 |
5.0% |
+34.6% |
$46 |
+31% |
|
Banker |
$12.63 |
4.6% |
-2.5% |
$46 |
+90% |
If you want access to my top "Yield Doublers"
stocks -- each
of which have plenty of double- and triple-digit upside
potential left in them before reaching my estimated fair
value price --
simply visit this link.
Good Investing,
-- Nathan Slaughter
Editor
Half-Priced Stocks
|
Additional Investing Ideas
|
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Dial Up Big
Gains with This Unique Telecom Fund
In the U.S., we can't do without our cell phones,
making some wireless communication companies a
defensive play in tough economic times. But don't be
misled by the leisurely pace of telecommunications
in developed countries. In emerging markets, mobile
phone use is expected to double in the next five
years. You can capture the gains from these
fast-growing telecom markets without having to
invest in dozens of stocks or trade on far off
foreign exchanges. Nathan Slaughter, editor of
The ETF Authority, tells you how. |
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GM
Bankruptcy Sends the Ultimate Buy Signal
You've heard the news about General Motors, not the
largest but perhaps the most significant bankruptcy
filing in history. You know the back story -- you've
driven it. But with all the historical context,
hand-wringing and harrumphing, do you know what GM
means for you as investor? |
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Get Safe
Reliable Income from this Little-Known Oil Play
Most
experts say that the market is beginning to look
fairly valued from a fundamental perspective. And
even setting aside the fundamentals, there's clearly
a limit to how far stocks can advance before the
investors start to stumble over psychological
barriers. That's the ball game for a lot of
investors. It doesn't have to be. In fact, income
investors don't have to worry about any of it. |
Visit this
link to read additional articles from today's
leading market experts!
|
|
 Paul Tracy
Co-Editor
TopStockAnalysts Digest
|
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