Rather than focusing on high current dividend yields, you might build an income stream for retirement by holding stocks over the long term as payouts increase
In the comment section of a recent MarketWatch article listing stocks with high dividend yields that were expected to be well supported by the companies’ cash flow, a reader suggested that it would have been useful to look at the stocks’ performance as well. After all, if you begin with a high dividend yield but watch share price decline over the years, your overall return might be lousy.
So today, instead of a screen designed to highlight stocks with high current dividend yields, we look at the compounding of dividend payouts over time. A long-term investor building a nest egg with a plan to eventually draw income from it may be well served on a total-return basis if the payouts increase significantly over time.
Here’s an example:
- If you had purchased shares of Lowe’s Cos. LOW five years ago, you would have paid $98.40 a share if you went in at the close on Aug. 14, 2018. At that time, the company’s quarterly dividend was 48 cents a share, for an annual dividend rate of $1.92, which made for a then-current yield of 1.95%.
- If you had held your shares of Lowe’s for five years through Monday, your quarterly dividend would have increased to $1.10 a share, for a current annual payout of $4.40. The company’s dividend has increased at a compound annual growth rate (CAGR) of 18.04% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at a CAGR of 6.16% over the past five years, according to FactSet.
- That annual payout rate of $4.40 would make for a current dividend yield of 1.95% for a new investor who went in at Monday’s closing price of $225.89. But if you had not reinvested, the dividend yield on your five-year-old shares (based on what you would have paid for them) would be 4.47%. And your share price would have risen 130%. And if you had reinvested your dividends, your total return for the five years would have been 151%, compared with a 74% return for the S&P 500 during that period.
For a new screen of dividend compounders, we began with the S&P 500. And for a reasonable starting point, we narrowed the group to 268 stocks whose dividend yields were at least 1.5% as of Aug. 14, 2018.
Among those 268 companies, the following 20 have had the highest dividend CAGR over the past five years. See the note below the table for important information.
| Company | Ticker | Five-year dividend CAGR | Dividend yield on shares purchased five years ago | Dividend yield five years ago | Current dividend yield | Five-year price change | Five-year total return |
| Tractor Supply Co. | TSCO | 27.14% | 5.06% | 1.52% | 1.85% | 173% | 193% |
| Newmont Corp. | NEM | 23.36% | 4.71% | 1.65% | 4.05% | 16% | 37% |
| Morgan Stanley | MS | 23.16% | 7.10% | 2.51% | 3.89% | 82% | 111% |
| Broadcom Inc. | AVGO | 21.32% | 8.88% | 3.38% | 2.15% | 312% | 390% |
| Invitation Homes Inc. | INVH | 18.77% | 4.59% | 1.94% | 3.02% | 52% | 71% |
| Lowe’s Cos. | LOW | 18.04% | 4.47% | 1.95% | 1.95% | 130% | 151% |
| Steel Dynamics Inc. | STLD | 17.78% | 3.90% | 1.72% | 1.58% | 147% | 178% |
| Microchip Technology Inc. | MCHP | 17.64% | 3.90% | 1.73% | 1.97% | 98% | 113% |
| Oracle Corp. | ORCL | 16.05% | 3.32% | 1.58% | 1.38% | 140% | 160% |
| Kroger Co. | KR | 15.68% | 3.81% | 1.84% | 2.39% | 59% | 77% |
| Best Buy Co. | BBY | 15.38% | 4.69% | 2.29% | 4.65% | 1% | 19% |
| American Tower Corp. | AMT | 15.31% | 4.21% | 2.07% | 3.36% | 26% | 40% |
| Home Depot Inc. | HD | 15.20% | 4.33% | 2.13% | 2.53% | 71% | 93% |
| Eli Lilly & Co. | LLY | 14.97% | 4.41% | 2.20% | 0.84% | 425% | 471% |
| Texas Instruments Inc. | TXN | 14.87% | 4.50% | 2.25% | 2.91% | 55% | 77% |
| Snap-on Inc. | SNA | 14.59% | 3.77% | 1.91% | 2.39% | 57% | 79% |
| Parker-Hannifin Corp. | PH | 14.26% | 3.56% | 1.83% | 1.43% | 149% | 171% |
| Allstate Corp. | ALL | 14.11% | 3.62% | 1.87% | 3.33% | 9% | 22% |
| HP Inc. | HPQ | 13.52% | 4.35% | 2.31% | 3.27% | 33% | 56% |
| VICI Properties Inc. | VICI | 13.05% | 7.76% | 4.20% | 5.09% | 52% | 98% |
| Source: FactSet | |||||||
Click on the tickers for more about each company.
Most of the dividends paid by these companies are regular quarterly dividends. But for Newmont Corp. NEM, the quarterly payout is based on spot prices for gold and on the company’s financial results. The company expects to pay an “annual base dividend” of a dollar a share on its “reserves gold pricing assumption” of $1,400 for 2023. Based on continuous front-month contracts on the New York Mercantile Exchange GC00, gold has fluctuated between $1,621.10 and $2,085.40 this year and traded for $1,934.10 early Monday. On top of the base quarterly payout of 25 cents a share, the company has most recently paid an additional 15 cents for a quarterly dividend of 40 cents over the past two quarters and for an annual dividend rate of $1.60 on the table above. But in 2022, the quarterly dividend rate was 55 cents and the annual rate was $2.20.
Fourteen of these 20 companies have beaten the S&P 500’s 74% total return over the past five years.
