"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years," Warren Buffett has famously said. Easier said than done, but it's an aim to strive for -- especially for dividend investors who are counting on dividend stocks to provide them with reliable income for years to come. On that note, here are two stock ideas that might fit the mold.
With a dividend yield of just 1.32%, Starbucks isn't typically referred to as a dividend stock. But investors with a long time horizon who buy Starbucks at today's price may lock in a substantial yield for the future.
Currently, Starbucks pays out just 42% of earnings in dividends, leaving plenty of breathing room for dividend growth in the future. In fact, Starbucks has already made a habit of increasing its dividend every year since it announced its first dividend in 2010.
Dividend growth rates will undoubtedly continue to decelerate, but probably not by much. Starbucks' scale advantages should continue to provide the company significant benefits, helping it maintain above-average levels of profitability over the long haul. In the U.S. alone, Starbucks has over 11,100 points of distribution -- that's about 3,900 more locations than runner-up Dunkin' Donuts. Furthermore, Starbucks is envied for its control of its own consumer product distribution, which gives the company significant cost advantages over its competitors.
Then there's Starbucks' monstrous growth opportunity in emerging markets like China, Brazil, and India. Management expects to triple its 500-store presence in China by 2015. Even more, they believe 4,000 to 5,000 locations in China alone is plausible over the longer term.
With Starbucks' low payout ratio, scale, and growth opportunities in mind, I think this forecast for its dividend growth over the next 10 years is conservative.
If Starbucks could pull this off, the company's dividend would be about $2.08 10 years from now, yielding investors a 3.3% dividend yield at today's price. Though this yield isn't substantial, my estimates were very conservative. Who knows? With so much growth opportunity, Starbucks may be able to increase its dividend by 15% or more every year for the next 10 years.
Yes, Warren Buffett has said that tech companies are risky bets. But he made an exception to this rule when it came to IBM, Berkshire Hathaway's third-largest equity holding. It turns out that tech companies can have economic moats too. Just imagine the synergy of the market leaders in enterprise software, services, and hardware all under one corporate umbrella -- that's IBM. So don't count tech stocks completely out of your dividend stocks prospects.
At today's price, IBM's dividend yields investors a 1.88% return. Already, the company has proven both its capability and its willingness to increase its dividend; in the last five years, the company has faithfully increased its dividend by about 15% per year.
Even after such significant dividend increases, IBM is only paying out 24% of its earnings, leaving plenty of room for dividend growth. If the company continued to increase its dividend at a conservative estimate of 10% annually for the next five years, and 5% for the next five, IBM's dividend growth would look like this:
If this estimate holds true, 10 years from now IBM investors could receive as much as $8.99 in dividends every year. At today's price, that's about a 4.3% yield.
Take a risk on the dividend, not on the business
Obviously these recommendations are for investors with very long time horizons. If you need income now, these might not be the best dividend stocks for you since their current yields are so low. Even more, there is no certainty that either of these companies will ever pay handsome dividend yields. But, more important, these are great businesses that will likely protect your principal.
A dividend is great, but risking my principal just to get a high dividend is something I'd rather not do.
What do you think? Are these good dividend stocks for long-term investors?