Dividend yield vs dividend growth

Dividend yield vs dividend growth, which one provides you with the biggest return? How did some example stocks do over the last decades and what are typical numbers? A short analyses today!

A lot and a lot more

Most dividend (growth) shares have risen tremendously in the past decades, as did their dividends. But what would be the best investment? High yield, low growth (but the benefit of being able to reinvest and increase the number of shares rapidly). Or lower yield, but higher growth of dividends (and often also significant share price growth)? Most of you whom have been dealing with this topic will likely guess the latter. Many new investors will sway for the first! Instant gratification is awesome, but I could cost your lots of money in the longer term.

Dividend yield vs dividend growth: think long term!

Today a few scenarios to visualise the differences between various dividend yields and dividend growth numbers. Plus a few actual numbers from various shares for comparison. Some of the results might actually surprise you, it did for me!

Assumptions & limitations

As with everything I calculate on this blog, I always note the important assumptions and limitations. Here is a list:

  • My calculation methods are simplified, share price increases are only modelled once per year for example.
  • I’ve looked at the effects of dividend payments per year, quarter or per month
  • Modelling period is 30 years, share price growth and dividend growth is assumed consistent and continuous (which does not happen in reality)
  • Dividend growth and share price growth are identical to maintain yield at the noted values (this does not necessarily happen in real-life either!).
  • All dividends are reinvested. If any cash remains (due to purchase of “whole” number of shares), this was added to the next dividend payment and converted into shares.
  • No fees were assumed for conversion of dividend and/or cash into new shares!
  • Starting amount is (approximately) €5.000 (1.000 shares of €5.0 each – or actual numbers as applicable)
  • For actual stock examples; I don’t have access to a handy database with various dividend data in combination with share prices, I’ve done some basic modelling over the noted periods to get a rough idea and end up at the same numbers as we are today (i.e. dividend growth, yield and stock price).
  • The note above has caused discrepancies between model and the actual data, results and annual yields for example companies!
  • A time frame of 25 years is applied to various dividend growth shares, from November 1994 to November 2019 (25 years). Yes, this is completely arbitrary.
  • For the S&P500 returns also the period from November 1994 to November 2019 (25 years) is used, based on data from this site.

Scenarios

I’ve reviewed a total of 19 scenarios. The first 12 are various scenarios in terms of low (2%) to high (7%) yield combined with high (10%) to low (1%) dividend/share price growth. I’ve also looked at the yearly/quarterly/monthly dividend distribution for each yield and dividend/share price growth combos.

The next 5 are actual stocks and their changes over time from 1994 to now (two REIT’s, one utility, one consumer defensive and one industrial stock). The last two scenarios are the S&P500 with and without dividend reinvested. These are just for comparison purposes.

Results

Taking all of the above into consideration, this is what I calculated:

Dividend yield vs dividend growth: the results

And some of the data from above but in graph form (quarterly dividend graphs only!):

Dividend yield vs dividend growth: the graph that says it all

Discussion

Not really surprising but low yield and high growth is better, financially speaking. Second, also not a surprise, more dividend payments per year equals a slightly higher overall return. Obviously thanks to the additional shares purchased regularly with dividends, which then start to contribute to the dividend and growth at the same time.

Looking at the data above, chasing high yield with low growth could costs you as much a lot of money in the longer term. I mean, for the fictitious companies, comparing to low yield (2%) and high growth (10%) it’s almost a factor 3 difference! Don’t let that short term gratification get the upper hand!

Dividend yield vs dividend growth: it’s got to grow!

Reits

So what’s the interesting part? Well, the REIT certainly were interesting to investigate. Both Realty Income and Federal Realty Investment Trust showed massive yields back in the mid 90’s. I mean +10%! However, both stocks have “only” made 4.7% and 3.9% dividend growth respectively. Fast forward to last November and the yield are down to around the 3.5% mark. That’s quite the decline. Yet both stocks were still able to grow 9.3% and 7.6% per year in stock price value respectively. Especially Realty Income seems to have been a perfect storm of (initially) high dividend and high stock price growth. It’s the biggest winner of the shares and scenario’s reviewed. What i’m actually really curious about is how the dividend yield will develop in the future for these real estate related stocks. Because their yield seems to have declined with declining interest percentages. But that can be another post on it’s own!

Dividend growers

Other dividend growth stocks (i.e. J&J, 3M and Canadian Utility) show a more stable yield throughout the years, with the latter (CU.to) providing a slightly higher yield. All three shares grew in terms of stock price sightly slower (at around €7.5-8%) compared with the overall S&P500 (at 8.7%), but their dividend growth was high at between 6.4% and 11.3% and considerably more table than that of the S&P500, which had two declines in that same 25 year period. If it’s cash-flow you like, dividend growth shares are definitely the way to go.

That being said, if it’s total value you are worried about you would probably have been better off buying and ETF for the S&P500 for that particular period. Notable exception is Real Income, which would have been a brilliant investment with nearly 14% compound average annual total return (according their website, it’s even higher at 16.8% since the beginning of their listing earlier in 1994!).

How do you like your dividends?

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6 Comments

  1. Good post CF.

    I have a few high yield stocks in the portfolio like Shell / BP / OHI which generates good cash every quarter.
    From the money I receive from them I buy low yield – growth stocks who are attractively valued like JNJ – MMM – TGT – PEP and other dividend kings
    Wil

  2. A fascinating read CF.
    It also aligns with the fact that high yield, especially above 5 – 6%, is almost always going to get cut to a more sustainable level or even stopped completely because of the underlying issues the company faces.
    It’s also funny that at the same time I write about 24 European dividend stocks that could be interesting in 2020.

    Keep up the good stuff CF! 🙂

    1. Neah, not necessarily, lots of REIT will be able to maintain a higher yield (which allows for lots of DRIPs) due to the required higher payouts. But with the lack of dividend growth for most, it still is not as good an investment. That being said, if you want the cash-flow now, it might still be a good investment!
      Nice going on the European stock overview.

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