Once upon a time, high dividend yields were plentiful… so much so that they may have been taken for granted.
And now, the tired adage, “You never know how good something is, until it’s gone” has never been more true.
For the past few years, the market has been trending away from high-yield dividend payments. As I wrote recently in Dividend Opportunities, just seven stocks in the S&P 500 carry a dividend yield over 6%. On top of that, the average yield for S&P 500 companies is a measly 1.96%.
[ad#Google Adsense 336×280-IA]But I’d like to remind you that just because high-yields are increasingly scarce in today’s market doesn’t mean you have to settle.
What I am getting at is that while high-yields are nice, they aren’t the end-all, be-all of dividend investing.
To frame our conversation, let me pose this question: Would you rather have a stagnant 7% yield or a 5% yield that grows by 10% every year?
While on its face a high dividend yield is very attractive, growing dividends can turn even lower-yielding stocks into big income producers over time.
To see what I mean, look below at the income streams from a stock yielding 7% but not growing dividends, versus a 5% yielder that hikes payments 10% every year. If you invested $10,000 in each of these stocks, here is the income stream each would produce for you on a yearly basis:
In just five years, that 5% yield would actually be worth more than the 7% yield. And just two years later, your income stream would grow to be 27% more than the stock yielding 7%. Over time the effect continues to multiply. After fifteen years, your annual income would grow to $1,900 — 170% more than the stagnant dividend.
With all this in mind, I’ve found one sector that is the most fertile ground for these dividend growers — tech.
Since the inception of tech as an industry, tech stocks and dividends have typically mixed like oil and water.
A decade ago, these fast-growing businesses were pumping most of their cash into research, development, acquisitions and other initiatives to keep from getting left behind in an innovative tech industry. They simply didn’t have much left to return to stockholders.
Relatively few stocks in the tech sector paid dividends at the time. Those that did rarely offered much more than a token payment every three months.
Thankfully, we live in a different world now…
According to Factset Research, two-thirds (66.7%) of all tech stocks in the S&P 500 now have a regular dividend. That’s up from just 42.1% at the beginning of 2011.
And in the first quarter of this year, the tech sector led the market with year-over-year dividend growth of 24.2%. That’s nearly double the average 12.5% dividend growth for the S&P 500.
This is nothing new. These guys have delivered the strongest dividend growth of any group for the past six consecutive quarters.
Take Apple (Nasdaq: AAPL) for example, who boosted its quarterly dividend by 24% from a year ago to $0.47 per share. The company has paid out a staggering $11 billion in dividends over the past 12 months. That’s a lot of iPhones.
Apple wasn’t alone. Routing giant Cisco Systems (Nasdaq: CSCO) and hard drive maker Seagate Technology (Nasdaq: STX) are also both in the top-ten with dividend growth of 32.1% and 27.6%, respectively.
Perhaps one of the most impressive dividend raises came from Texas Instruments (Nasdaq: TXN). The tech company has raised the size of its dividend by a whopping 54.4% in the past year. That ranks second among the entire S&P 500.
Here’s what that dividend growth would mean for you as an income investor. Let’s say you bought Texas Instruments today at roughly $50 a share. In the first year of holding the stock, you would expect to receive $1.20 per share in dividends, for a dividend yield of 2.4% ($1.20/$50). On a $100,000 investment, that’s about $2,400 per year in dividend income.
Not a bad way to start. But if Texas Instruments raised their dividend payment by 25% a year — less than half as much as it did this year — your $50 shares would be paying you $3.66 per share in dividends five years from now — or 205% more in annual dividend income than when you bought the stock.
On a $100,000 original investment, that means your annual dividend income would grow from $2,400 in the first year to more than $7,320 in the fifth year, as you can see in the chart below.
Put another way, if you’re earning $7,324 from a $100,000 original investment, that means you would be effectively collecting a 7.3% dividend yield. And that yield would grow larger every time the company raised its dividend going forward.
That’s the power of dividend growth. It starts off slow, but over time, your income stream will build to levels you don’t always see from static high-yield stocks.
So while the market as a whole might be heading toward a dividend-lean environment, there are still great opportunities to invest in today’s fastest dividend growers. After all, these are the very stocks that will turn into the high yielders of tomorrow.
Source: Dividend Opportunities