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Dividend Growth Opportunities







One of the most glaring benefits of weak global equity markets over the last year has been the fact that dividend yields are at their most attractive levels in nearly 30 years. This is especially so when we compare dividend yields to government bond yields. This has been a rare event over the last six decades.<br />






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Uncovering Dividend Growth
Opportunities


One of the most
glaring benefits of weak global equity markets over the last year has
been the fact that dividend yields are at their most attractive levels
in nearly 30 years. This is especially so when we compare dividend
yields to government bond yields. This has been a rare event over the
last six decades. Despite the historic opportunities too many investors
are ignoring them and are still fleeing into the bond market. Recent
fund flow data shows that capital is rolling into the bond markets –
despite the cratering of interest rates.

 

Dividend Growth Stocks

Click
here
to view a larger version of this table

Looking
at the dividend data for the S&P 500 companies shows that 109
companies do not pay a dividend currently. If we take the remaining 391
companies, we can glean a few insights that would prove helpful to
anyone looking at enhancing their portfolio’s dividend income.

 

One of the mistakes investors
commonly make when looking to add a dividend paying company to their
portfolio is to simply look at the stocks with the highest current
yield. This is calculated by taking the current dividend and dividing
by the current market price. This should just be a starting point – but
too often it is the start and finish of dividend analysis for many
investors.

 


What
matters at least as much – and sometimes more – is the dividend growth
rate. That is, what will the dividend yield be five years or even ten
years from today for an investor who wants to buy and put away an
investment in a dividend paying equity.

 


From the
data in the table, we can see that of the ten companies in the
S&P 500 and S&P 100 indexes with the fastest rate of
dividend increase over the last five years there is not a single
utility or telephone company that ranks as a top dividend growth
company. However, all too often investors start and stop with telecom
and utility stocks when looking for dividend stocks. To take a look at
what these dividend growth rates mean from a practical basis, we can
look at the example of Comcast Corp. The company used to be penalized
by the market in terms of its valuation because investors would often
fear that the company would spend its cash flow on possibly risky
acquisitions as it maintained a relatively small dividend. For a time
this was true. As the company began to pay down its debt and cutback on
acquisitions, the company has begun to ramp up its dividend. As it has
grown its dividend by 21% annually, the dividend yield should be
approaching 4% over the next four years at its current 5 year dividend
growth rate.

 


One other
metric that investors can use to gauge dividend paying equities is the
payout ratio – or the percentage of profits paid out to shareholders in
the form of dividends. Generally, a low payout ratio means that the
company is able to enhance or increase its dividend growth rate. To see
this, we can see that for some of the companies in the table the rate
of dividend increase has appreciated significantly over the last five
years when compared to the ten year rate of increase. In the case of
Comcast, the payout ratio is only about 31% which provides good
potential to increase the dividend over time.

 


One aspect
of dividend investing that does not get a lot of attention is the fact
that the greatest benefits of dividends comes from the compounding
effect. For an investor to reap the rewards of compounding dividend
growth rates requires patience and the ability to hold onto a company
for years. From a portfolio perspective, a good dividend growth company
with a good track record of growing earnings and dividends should
comprise part of the “buy and hold” portion of the portfolio. Patience
will be rewarded but it takes time.

 


In part,
this is an example of how companies with strong profit growth rates who
have current low dividend payout rates can be tomorrow’s high yielding
stock through the compounding of dividends. For dividend paying
investment opportunities, investors should look beyond just the current
dividend yield.


Pacifica
Partners – Capital Management

Navigating
a Sea of Opportunity

Disclaimer:

This report is for information purposes only and is neither a
solicitation for the purchase of securities nor an offer of securities.
The information contained in this report has been compiled from sources
we believe to be reliable, however, we make no guarantee,
representation or warranty, expressed or implied, as to such
information’s accuracy or completeness. All opinions and estimates
contained in this report, whether or not our own, are based on
assumptions we believe to be reasonable as of the date of the report
and are subject to change without notice. Past performance is not
indicative of future performance. Please
note that, as at the date of this report, our firm may hold positions
in some of the companies mentioned.

Copyright (C) 2012 Pacifica Partners Inc. All rights reserved.


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