Dividends are like magic beans. You plant a few pennies, and a year later you’re reaping dollars. Of course, that still leaves the question of which beans are better. And since there are few predictors, most of us like using yield. But as our friends at The Motley Fool demonstrate, high yield isn’t the sole consideration:
It’s Not Just About High Yield…
Dividends are likely to be highly sought after by investors, given the fact they’re an important component of long-term stock market returns and can provide a valuable secondary stream of income. But, investors who unduly focus too much on a high dividend yield might not be getting the best deal for themselves.
Let’s check out the three stocks listed in the table below to see why that’s so.
30 June 2007
30 June 2013
|Company||Price||Dividend Yield Then||Dividend Yield On 30 June 2007′s Cost Basis|
|SingTel (SGX: Z74)||S$3.40||6.0%||4.5%|
|Super Group (SGX: S10)||S$0.97||1.6%||7.3%|
|Jardine Matheson Holdings (SGX: J36)||US$23.80||2.1%|
What It Was Like Back on 30 June 2007
Telecommunications operator SingTel paid out an annual dividend of S$0.205 for its last completed financial year for an investor looking at the company on 30 June 2007, giving the company’s shares a yield of 6% then. That’s a high yield, given that the Straits Times Index (SGX: ^STI) was yielding an average of 3.7% back in 2007.
In contrast, the dividends coming from instant beverage manufacturer Super Group and conglomerate Jardine Matheson Holdings would not have been so attractive, given their relatively tiny yields of 1.6% and 2.1%.
But, for an investor who invested in all three companies on 30 June 2007, the dividend yields on their original cost basis, or yield-on-cost, would have shrunk for SingTel and grown much higher for Super Group and JMH as shown in the table above.
6 Years Later, Much has Changed for Those Dividends
Super Group and JMH’s dividends grew much larger in those six years, in contrast to SingTel’s smaller dividends. What was once relatively unattractive is now providing much better dividend returns for long-term investors.
|Dividends for last completed financial year|
|Company||on 30 June 2007||on 30 June 2013|
|Jardine Matheson Holdings||US$0.50||US$1.35|
Foolish Bottom Line
High dividend yields are attractive, no doubt. But, investors might leave a huge chunk of future-returns on the table if a high current-yield was their only focus, which explains the importance of a growing dividend. After a decade or two, those growing dividend paychecks might be far more lucrative than stagnant, but currently-high-yielding-ones.
American billionaire investor Warren Buffett’s investment in soda-maker Coca-Cola is a great example of how lucrative growing dividends can be over the long-term. Coke was giving Buffett a dividend yield of around 4% when he made his first investments in the company in 1988. But now, it is giving him a staggering – get this – 50% yield on his original cost basis!
Buffett’s focus was certainly not on haggling over a high yield. Instead, he focused on the potential for long-term dividend growth from the company. And, there’s no reason why we shouldn’t be doing this either.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t owns shares in Super Group.
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