Here’s how you can compound dividend stocks to double the S&P 500’s return


Companies are announcing dividend increases all the time, but here’s one that points to a simple investment strategy that can reduce risk and make a lot of money over the years.

Maybe not so exciting on the surface: Kroger Co. KR,
+ 0.82%,
a grocery operator, sharply increased its quarterly dividend payment, but the stock’s dividend yield, based on its closing price of $ 47.34 on June 22, is an uninteresting 2.20%.

But what if you bought Kroger shares five years earlier?

  • Shares closed at $ 22.56 on June 22, 2017. At the time, Kroger’s annual dividend payment was 48 cents per share, for a dividend yield of 2.13%. This is only slightly below the current 2.20% yield.

  • For five years, through the just-announced increase in annual payment to $ 1.04 per share, Kroger’s dividend has risen at a compound annual rate of 16.7%. Its shares have risen 110%, and the dividend yield on shares held for five years is 4.61%. The total return on shares over the five years with reinvested dividends was 133%, compared to a 69% return on the S&P 500 SPX index.
    + 0.95%,
    according to FactSet. That’s almost double the return, and remember Kroger is a shopkeeper.

There are different ways and reasons to select dividend shares:

  • Here’s an approach that favors quality companies that are expected to significantly increase dividends over time. Current yields can be modest.

  • Here is a screen of companies whose stocks have high dividend yields today and which analysts expect to generate enough cash to pay more.

Now let’s look back five years and see which companies in the S&P 500 have been the best dividend compositions.

Best dividend compounds

For this benchmark screen, we started with companies that had dividend yields of at least 2% on June 22, 2017. We compared these annualized payments with the companies ’current annual dividend rates to calculate a compound annual growth rate (CAGR). ). That’s all, and Kroger entered the top 10.

Below are the 10 shares of the S&P 500 that had dividend yields of at least 2% five years ago and have had the highest dividend CAGR since:

Company

Ticker

CAGR of five-year dividends

Dividend yield on shares purchased five years ago

Dividend yield: five years ago

Current dividend yield

Price change – 5 years

Total yield: 5 years

Tractors Supply Co.

TSCO,
+ 3.53%

27.8%

7.01%

2.06%

1.92%

266%

292%

Best Buy Co. Inc.

ABY,
+ 2.02%

20.9%

6.37%

2.46%

5.04%

27%

46%

Lowe’s Cos. Inc.

LOW,
+ 1.57%

20.7%

5.36%

2.09%

2.42%

122%

142%

NetApp Inc.

NTAP,
+ 0.23%

20.1%

5.11%

2.05%

3.09%

65%

89%

Regions Financial Corp.

RF,
-3.41%

19.4%

4.91%

2.02%

3.57%

38%

63%

Texas Instruments Inc.

TXN,
-0.96%

18.1%

5.82%

2.53%

3.01%

93%

120%

Kinder Morgan Inc. Class P

KMI,
-0.61%

17.3%

5.97%

2.69%

6.79%

-12%

15%

AbbVie Inc.

ABBV,
+ 1.28%

17.1%

7.71%

3.50%

3.82%

102%

153%

Kroger Co.

KR,
+ 0.82%

16.7%

4.61%

2.13%

2.20%

110%

133%

Union Pacific Corp.

UNP,
+ 0.36%

16.5%

4.84%

2.25%

2.49%

95%

116%

Source: FactSet

Seven of the 10 stocks have outperformed the five-year profitability of the S&P 500.

Click on the tickers to start your own search on any of the companies.

And read for free Tomi Kilgore’s detailed guide to the sheer amount of information on the MarketWatch quotes page, including dividend history.

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