Many income investors focus mainly onwhen they should be giving at least equal weight to growth, as well as prospects for future gains. Why is growth so important? The answer is simple: Even modest yearly increases in the add up to a sizable income over time for long-term holders. Consider the following example:
You purchase a stock paying a $0.12 dividend to $0.16 -- a 25% boost. A year later, the dividend is hiked again, this time to $0.20. The company reports a 25% dividend increase (a $0.04 increase divided by $0.16). From the perspective of the original holder, however, the actual income gain is 33% ($0.04 divided by $0.12).. The following year, the company increases the
The company calculates the increase based on the last rate, but individual holders should figure the increase based on the original rate whenwere purchased. This also applies when you consider the , too. It's easy to pay attention to what a stock is currently yielding, but for the investor who got in before a stock price goes up (and received those nice boosts), it's the " " on the original purchase price that really matters.
Returns become even more compelling when How to Earn 26.5% on $20,000"] Investors essentially acquire free stock by re-investing income in more and then turbo-charge the process by choosing stocks that consistently grow .are reinvested, because this leverages the power of . [See "
In selectinggrowth stocks, I consider a number of factors:
First, I begin with companies that have a track record of
Here are five stocks growth/yield hybrids that have also doubled dividends in the past five years:
1. McDonald's Corp. (NYSE: MCD)
America's largest restaurant franchise has grown earnings is 49%, which leaves a comfortable cushion for growth even if short-term fluctuations in earnings occur.payments 27.5% on average in each of the past five years. have risen 18%. growth above 25% means that McDonald's in effect doubles its payments every four years. The company is considered a " aristocrat," which means it has recorded at least 25 consecutive years of growth. McDonald's current payout from
2. Medtronic, Inc. (NYSE: MDT)
This maker of medical devices has impressed by boosting19.6% on average each of the past five years. growth has been favorable as well, although slightly slower, at 13.6% a year. Medtronic has increased its every year for 33 consecutive years. Payout is modest at 30% of earnings and leaves ample room for more growth.
3. Illinois Tool Works (NYSE: ITW)
Annualpayments for this industrial equipment manufacturer have increased 19% each of the past five years. In the last 25 years, the company has managed to double its every five years. Payout is typically below 39%. This allows flexibility for future growth.
A caveat regarding Illinois Tool Works is thatgrowth has been mildly negative in recent years at 2.5%. However, the company is rebounding from the recession. Consensus analyst estimates look for 20% growth next year and annual growth averaging 16% in the next five years.
4. Automatic Data Processing (Nasdaq: ADP)
Payroll processing services provider ADP has grown annual EPS growth has been positive but slightly slower at 12.6%. The track record during the past 25 years shows a consistent pattern of ADP doubling its every five years. At present, the company's dividend payout from earnings is a bit high at 56%, but ADP generates strong (payout as a percentage of is a reasonable 43%).
5. Wal-Mart Stores (NYSE: WMT)
America's leading discount retailer is also a leader ingrowth. The company has produced 16% annual growth in during the past five years and effectively doubled the . In addition, Wal-Mart has a track record indicating 36 consecutive years of growth and annual growth over 10 years exceeding 18%. EPS growth has been reliable, averaging 8.6%. Payout is modest at 29% and provides a nice cushion for future increases.
Action to take--> Aggressive investors should like Illinois Tool Works for its sizable gains and improving growth prospects. More conservative investors may prefer steadier, less cyclical performers such as McDonald's and Wal-Mart.