I just received a piece of direct mail urging me to subscribe to Kiplinger's Retirement Report. Included were a few sample pages, and it was on one of those that I spied a list of "High-Dividend Stocks." The piece explained that the four companies were chosen for having 10 years of consecutive dividend increases and good projected earnings. The companies were:
- SunTrust Banks (NYSE:STI)
- US Bancorp (NYSE:USB)
- Mercury General (NYSE:MCY)
- General Electric (NYSE:GE)
So far so good, right? Well, not entirely. The piece left me rather unsatisfied. For one thing, what are "good" projected earnings? What kind of growth rate is expected of these firms? The reader is given no such information.
Next, consider the "10 years of consecutive dividend increases." I even have a problem with that -- because it's not a high enough hurdle for me. Such companies are certainly better than companies with 10 years of consecutive dividend decreases, but we're not told just how quickly the dividends in question were hiked. Remember -- 10 consecutive increases could involve an increase of a penny each year, from an annual dividend of $2.30 to $2.31 to $2.32 to ... $2.39. Overall, the 4% increase from $2.30 to $2.39 over a decade amounts to an average annual growth rate of much less than 1% per year.
Now in this particular case, I looked into the dividend growth rate for the four companies and found that over the decade, they grew by an average of 12% to 13% per year. So that's actually rather good. It's enough to roughly triple the dividend over 10 years.
It can pay to be a little skeptical when you read the financial press. Do some digging on your own to learn more about companies offered to you as investment ideas. Be even more cautious when reading communications from companies themselves. In press releases, companies often trumpet things like "record earnings!" Just know that the record earnings could be merely 1% greater than the previous year's record earnings.
