Wednesday, September 23, 2015

3 Styles Of Successful Dividend Investing

There are certainly many ways to categorize the different styles of investing in dividend stocks, including yield, risk, growth, etc. An investment strategy based on any of these could be successful, if implemented within the framework well-crafted plan. Over the years, I have found that most dividend investing styles fall into one of the three major categories listed below:

High Yield/Low Growth

I would classify dividend stocks with a yield over 5% and dividend growth less than 2.5% in this group. This is probably the most popular group, particularly among those new to income investing. It is human nature to want it now and lots of it, and high yield stocks appear to deliver that desire. However, there is often a reason the stock's yield is so high and many times the investor learns the hard way the yield is not always sustainable. Examples of stocks in the high yield/low growth group include:

Digital Realty Trust, Inc. (DLR)
Yield: 5.3% | Dividend Growth: 2.4%

Urstadt Biddle Properties Inc. (UBA)
Yield: 5.3% | Dividend Growth: 0.8%

Universal Health Realty Income (UHT)
Yield: 5.4% | Dividend Growth: 1.1%

AT&T Inc. (T)
Yield: 5.8% | Dividend Growth: 2.2%

W.P. Carey Inc.  (WPC)
Yield: 6.5% | Dividend Growth: 2.0%

Low Yield/High Growth

I would classify dividend stocks with a yield less than 2.5% and dividend growth greater than 7.5% in this group. Low yield and high growth dividend stocks are the other extreme of high yield and low growth stocks. Their long-term risk is associated with growing the yield-on-cost over time. If the dividend growth rate is cut, the investor's future earnings and yield will also be cut. Stocks in this group would include:

Fedex Corporation  (FDX)
Yield: 0.6% | Dividend Growth: 9.1%

Nike, Inc. (NKE)
Yield: 0.9% | Dividend Growth: 15.6%

General Dynamics Corporation Co (GD)
Yield: 2.0% | Dividend Growth: 10.1%

Union Pacific Corporation (UNP)
Yield: 2.4% | Dividend Growth: 15.0%

Illinois Tool Works Inc. (ITW)
Yield: 2.4% | Dividend Growth: 8.7%

Moderate Yield/Moderate Growth

I would classify dividend stocks with a yield between 2.5% to 5% and a dividend growth rate between 2.5% to 7.5% in this group. This is a good compromise between the above too extremes. It is an approach focusing on a moderate yield and dividend growth rate. Keeping these two metrics at a reasonable level will help reduce the likelihood of either being cut. Companies in this group are your traditional dividend growth stocks, as seen from the list below:

Pepsico, Inc. (PEP)
Yield: 3.0% | Dividend Growth: 7.5%

Johnson & Johnson (JNJ)
Yield: 3.2% | Dividend Growth: 6.6%

McDonald's Corp. (MCD)
Yield: 3.5% | Dividend Growth: 3.7%

Exxon Mobil Corporation (XOM)
Yield: 4.0% | Dividend Growth: 5.8%

Emerson Electric Company  (EMR)
Yield: 4.2% | Dividend Growth: 6.4%

In my personal investing strategy, I incorporate measured participation in each of the above groups. My primary focus is on the Moderate Yield/Moderate Growth stocks, believing that over time this group carriers the highest likelihood of success. The remaining two groups offer the potential for above average returns - as long as they continue to perform at the estimated level, which is often difficult to do over time.

Full Disclosure: Long GD, UHT, T, ITW, PEP, JNJ, MCD, XOM, EMR, in my Dividend Growth Portfolio and long DLR, UBA in my High-Yield Portfolio. See a list of all my dividend growth holdings here.

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