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Does Nike Inc. Belong in Your Dividend Portfolio?

By Anders Bylund – Mar 21, 2014 at 2:00PM

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Nike's dividend may look soft, but there's a very good and very pleasant reason for that.

Nike Chairman Phil Knight, surrounded by the shoes that built his legacy. Image source: Nike.

Nike (NKE -1.45%) has never been an obvious dividend play. With a current dividend yield of just 1.2%, the athletic-gear maker offers the fourth-smallest yield among the 30 Dow Jones Industrial Average (^DJI -0.07%) members. The average Dow yield right now is 2.6%, and Nike's payout hasn't matched that yield at any time in the last 10 years.

NKE Dividend Yield (TTM) Chart

NKE Dividend Yield (TTM) data by YCharts.

But that doesn't mean that Nike isn't trying to treat its shareholders right. That would be silly, considering that co-founder and Chairman Phil Knight owns nearly 20% of the company. That's plenty of incentive to align Nike's payout policies with the best interest of shareholders.

The company has nearly doubled its dividend payouts in the last five years, and almost quadrupled them in the last decade. The yield has stayed low because Nike shares were rising faster than the dividend policy. That's a very nice problem to have.

NKE Chart

NKE data by YCharts.

The dueling chart lines do represent a dilemma for ultratraditional income investors. Once your automatic dividend reinvestment plan is in play, it's actually better to see share prices falling and staying low. That way, your dividend checks buy more shares at a cheaper valuation, and a true dividend investor isn't planning to sell the underlying shares anyway.

That said, I still insist that Nike's dividend-limiting price gains remains more of a boon than a blight on the stock. Yes, even for dividend investors.

NKE Chart

NKE data by YCharts

If you bought Nike stock 10 years ago, you locked in a split-adjusted starting price of $19.10 per share. Measured against that base, today's annual payout at $0.96 per share works out to an effective yield just north of 5%.

Nike shares have tripled in 10 years, but the return rises to 363% if you reinvested those seemingly forgettable dividends along the way. That's a 63% boost, and it makes an even bigger difference over multiple decades.

So Nike may not look like the Dow's richest dividend play right now. But patience is a virtue, and Nike is doing all it can to keep rewarding shareholders -- on top of swiftly rising share prices. And when the time finally comes to sell your Nike shares (deep in retirement, when Nike's business changes for the worse, or maybe to handle a temporary cash crunch) those high share prices sure will come in handy.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Nike.

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