Dividend Yield is a Matter of Perspective

A reader asks:

How is it that you can characterize stocks that yield less than 2% as "dividend" stocks?

Touc's reply:

The purpose of tracking the stocks in our Dividend Achiever Watch List is because the companies have a history of increasing their dividend every year for at least 10 years in a row. The choice of selecting a Dividend Achiever based on the yield becomes up to the investor.

However, as a matter of observation, selecting stocks based solely on the "high" yield has seldom resulted in long-term financial security. In addition, my "research" has shown that stocks with a low dividend yield but a higher average annual compound growth of the dividend tend to outperform stocks with a "high" dividend yield but a low compounded annual growth rate of the dividend. For this reason, I'm willing to look more closely at the compounded annual growth rate of the dividend for lower yielding stocks. Again, this is among the many factors that go into selecting any one of the stocks on our New Low Watch List.

Another factor that we consider when selecting Dividend Achievers is the relative yield of the stock. If a stock has a history of dividend payment increases over an extended period of time then we can determine the relative buy and sell points. Buying and selling stocks based on the relative yield is explained in the books Relative Dividend Yield by Anthony Spare, Dividends Don't Lie by Geraldine Weiss and Dividends Still Don't Lie by Kelley Wright. An excellent February 20, 2010 interview of Kelley Wright's most recent book can be found on the Financial Sense website here.

One example of a low yielding stock is Helmerich & Payne (HP). We recommended the stock on Sept. 2006 because, on a relative basis, the stock was under-priced. Subsequently, we gave a sell recommendation after the stock had gained 141% in August 2008. We later recommend HP when, on a relative basis, it was attractively priced in March 2009. Since March 2009, the stock has increased over 80% to the current price of $40.52. The point is that, on an absolute basis, the yield on HP never reached 1.50% when the stock was at its lowest price (high price = low yield/low price = high yield.) However, on a relative basis, the yield was very high for the stock.

It is far more important to focus on the history of dividend increases rather than the yield. Once you’ve narrowed down the quality stocks based on dividend increases then it is suggested that you compare the current dividend yield to the historical range for the stock in question. At least, this is the way the New Low Observer team likes to look at dividend paying stocks, regardless of the yield.


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