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Strategies & Market Trends : Dividend investing for retirement -- Ignore unavailable to you. Want to Upgrade?

To: Kip S who wrote (3776)	2/13/2010 6:15:50 PM
From: Paul Senior	1 Recommendation Read Replies (1) \| Respond to of 34328

I first attack it with the rule of 72. Put $100 into each stock. First stock pays 5% or $5/sh. Dividend grows at 5%, so in 72/5 or about 14 years the div. has doubled to $10. In the problem, I'm supposed to be "interested in dividend appreciation only". I don't understand quite what that means. If the stock is valued on its dividend and that doesn't change in 14 years, then the stock would still be trading at a 5% yield. $10/.05 = $200/sh. Second stock pays 3% or $3/sh. Dividend grows at 10%, so doubles to $6 in 7.2 years and doubles again in the next 7.2 years to $12/sh. (So 14 years is roughly similar time frames for both stocks.) Again, if the stock still has no relative change on dividend yield compared to where it was 14.4 years earlier, this stock would sell at 3% yield or at $12/.03 = $400/sh. Nothing new here that I see. Stocks with lower initial dividend percentages pay out and are eventually worth more than stocks with higher initial dividends but lower growth going forward of those dividends. The issue isn't even in finding such stocks. There are plenty of them (aristocrats). The issue is being aware of such compounding of dividends and having the money and actually acting on an intent to buy one or several of these. And having the determination and fortitude to hold on for 14 years. Through the ups and downs of the stocks, through the media and experts changing of their opinions of the stocks, and through life- wherein the investor decides after a while that maybe the money should be withdrawn for better or different family uses or different (e.g. growth or media-popular) stocks. Jmo based on my experience of course.

To: Kip S who wrote (3776)	2/13/2010 6:50:00 PM
From: research1234	Read Replies (1) \| Respond to of 34328

Calls for a straightforward present value comparison. Discount the stream of future dividends and stock value assumed at the end of period (for simplicity, assume that the ending dividend yield is the same as the beginning yield)for each investment using whatever long term total investment return assumption you expect. A comparison of the PV values with the initial investments will tell you which is best based on your assumptions. Varying this long term assumption will give you some insights as well..

To: Kip S who wrote (3776)	2/13/2010 7:56:42 PM
From: Steve Felix	Respond to of 34328

I'll take T for tortoise figuring that somewhere around year 14 I overtake the hare, leaving out all other possible variables.

To: Kip S who wrote (3776)	2/13/2010 8:12:58 PM
From: chowder	Respond to of 34328

I'll take the one that 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). In fact, I already have! :o) But, my objective is dividend growth over the long run and I believe the 3-10 scenario grows slightly faster than the 5-5 scenario. I've got both actually. But for now I'm not drawing the dividends, I'm reinvesting them. I think you'd need to assume an inflation number to determine which one is better for offsetting inflation though. If you assume 4% inflation, you might need to go with 5-5 if you are taking the cash dividends to live off of.

To: Kip S who wrote (3776)	2/14/2010 10:03:25 AM
From: chowder	Respond to of 34328

I responded to your question yesterday rather rapidly. I gave you my analysis quickly so you wouldn't think I was avoiding the question. I have additional analysis I would like to add to my original comments. First the original comments: I'll take the one that 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). In fact, I already have! :o) But, my objective is dividend growth over the long run and I believe the 3-10 scenario grows slightly faster than the 5-5 scenario. I've got both actually. But for now I'm not drawing the dividends, I'm reinvesting them. I think you'd need to assume an inflation number to determine which one is better for offsetting inflation though. If you assume 4% inflation, you might need to go with 5-5 if you are taking the cash dividends to live off of. Again, although one is looking for strictly income, without consideration for capital gains, situations still vary and it's a matter of personal choice and what makes one comfortable enough to stick with the long term plan. It isn't a matter of which one is right or wrong, it's a matter of which one you feel most comfortable with based on your long term objectives. From my point of view, others may have different objectives, I want the security of the dividend growth. You suggested a 3-10 or a 5-5 scenario. I would go with the one that has increased their dividends for the longer period of time. If one has 25 consecutive years of increased dividends and the other just 8 years, I'm going with the company who has increased the dividend for 25 consecutive years, regardless of whether it's the 3-10 or 5-5 stock.

To: Kip S who wrote (3776)	2/14/2010 2:58:54 PM
From: Kip S	3 Recommendations Read Replies (2) \| Respond to of 34328

Dividend Growth Choices: T with 10% Growth, 3% Yield or F with 5% Growth, 5% Yield? dabum, you are correct, of course, in that there is no "right" answer. The better choice depends on many factors, not the least of which is knowing the future. However, I tried to set up the question as one of lower yield, faster growth or higher yield, slower growth. The idea was to shed some light on the choice between investing (for dividends) in, say, PG and the 5%, 5% stock--not sure what a typical candidate there would be--maybe a utility. For the two stocks, I calculated their dividends out 30 years and took the present values of the dividend streams to see how long it would take T to overtake F in terms of the present value of future dividends. I used a discount rate of 10%, but the results were not particularly sensitive to the choice of discount rate. Using 12%--arguably a better choice-- pushes out the crossover a couple years, while using 8% shortens it by one or two years. So, it takes 25 years for the present value of T's dividends to surpass F's. That's longer than I would have expected. For me, this suggests that F better suits my needs. Even though I am a delayed-gratification kind of guy, the benefit of the higher yield upfront is too high for me to ignore. Also, I am not concerned about my estate, in that it will be more than sufficient for my child. If estate value was a big factor, that would make T look a bit more attractive, But...there are some big "buts" to consider. A Few "Buts:" If T is actually able to increase its dividend 10% annually for 25 or 30 years, it's price will certainly be much higher than F's. But, T is unlikely to be able to maintain that growth rate indefinitely. Wal-Mart cannot grow 10% or 15% forever or the whole world would be buying everything from them. That's another way of saying that T is likely riskier than F due to its "supernormal" growth. Also, this analysis does not depend on what you do with the dividends, consume them or invest them. Their value is the same--and they should be valued the same. One other thing, in terms of the choice of the discount rate. We have finite lives, and (especially) if you are living off your dividends, you might want to attach a higher discount rate to those cashflows. This would be particularly true as you age. At 80, your expected life span is much shorter than at 65, so the higher discount rate would give more weight to near-term dividends. Well, I hope this helps somebody out there. If nothing else, it helped me in terms of the tradeoff between higher-yielding, slower-growing and lower-yielding, faster growers.