A while back, in an article titled "How I'm Grabbing 20% Dividend Yields," I explained that if you buy a strong and growing dividend payer and hold on for years, you can watch the dividend yield you receive based on your purchase price rise to 20% or 30% or more.
We invite readers to add comments to any of our articles, and many readers posted their thoughts on this topic. Some readers passionately took issue with me. I agree with many of their thoughts -- but not all of them.
For starters, someone quibbled about my title and wondered why I didn't just present some companies with actual current yields around 20%. Well, the reason I didn't was that those kinds of dividends can be dicey. When a stock's price falls, its yield rises, so sometimes a steep yield reflects a stock that has plunged and is in so much trouble that it may well cut its dividend.
Looking forward
Others, objecting to the whole idea of "effective yield," said the only thing that matters is the stock's performance going forward. I agree that it is critical to look forward, since the past is done. Still, I think it can be useful to assess your past investments, so you can look for successes and mistakes, as well as get an idea of how much you're reaping today from an investment you made in the past. If you have a 20% effective yield on some of your stocks, then not only are you getting a nice payout, but your shares have also probably risen considerably.
Another reader contention was that we should always compare our current investments with other available options. I didn't mean to suggest otherwise, because this is true. Imagine that you're enjoying a 20% effective yield and your initial $5,000 investment is now worth $25,000. If you want to evaluate possible alternative investments, don't compare them with the 20% yield. Instead, compare them with your holding's current yield, which might be more like 3% or 4%, because in this context, you're assessing what you can get from your current $25,000, not how you're doing based on your initial $5,000 investment.
As you look for other possibilities, look not only at dividend yield but also dividend growth rates. Here are some other companies that popped up when I screened for dividend yields of 2.5% or more, five-year average annual dividend growth rates of 8% or more, and price-to-earnings ratios of 20 or less:
|
Company |
Recent Dividend Yield |
5-Year Dividend Growth |
P/E Ratio |
|---|---|---|---|
|
Alcon (NYSE:ACL) |
3.0% |
44% |
17 |
|
American Express (NYSE:AXP) |
3.0% |
13% |
13 |
|
Coca-Cola (NYSE:KO) |
3.4% |
8% |
20 |
|
Norfolk Southern (NYSE:NSC) |
3.5% |
33% |
9 |
|
Paychex (NASDAQ:PAYX) |
4.9% |
23 |
17 |
|
Sunoco (NYSE:SUN) |
5.1% |
18% |
3 |
|
Caterpillar (NYSE:CAT) |
4.9% |
17% |
9 |
Data: Yahoo! Finance.
Some support, too ...
Some readers liked what I wrote. A few of you pointed out that if you're enjoying a hefty effective yield, you're probably invested in a solid, growing stock, and you should think twice before looking for greener grass.
The bottom line is really that dividends are very powerful and can turbocharge your portfolio. So take some time to learn more about them, and consider keeping at least a few dividend-payers your portfolio.
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