I have been curious about a particular topic, so I set up a spreadsheet that lets me analyze the issue. However, I would like to ask anyone interested to weigh in with their thoughts on this, and then in about a day (if there is any interest) I will post my spreadsheet results. What I'll request, though, is that people who post use their intuition or investment process to answer the question. Give your reasons if you like. Hopefully, this will generate some discussion that will help all of us make better investment decisions--or at least better-informed ones. Hope this approach is OK with Steve, as moderator.
Here's the issue: You have the choice of investing in one of two stocks. One has a 3% yield and its dividend is expected to grow at 10% annually. Let's call this guy stock T (for three or ten). The other has a 5% yield, and the dividend is expected to grow at 5% annually. We'll call him stock F. You are interested in dividend income only, not capital appreciation. I am going to assume the risks are equivalent, to take that out of the equation, even though the faster-growing stock is almost certainly riskier.
Note that we have to select a relevant time period to make this an interesting question. If your expected holding period is two years, of course, you want to buy F. If you hold for 50 years--or forever--of, course you want T. Let's focus on a period that might capture a typical male's life span in retirement--about 18 years (from 65 to 83). So let's think about an 18- or 20-year holding period. Which do you buy, abstracting from any differences in capital gain--i.e., for income only?
I'll post how I approached this problem after (if) other people post their thoughts. If there is enough interest, I can put a few alternative number into the spreadsheet to see how they turn out.
Kip |
