This is the third part of a discussion on Dividend Growth Stocks. In August of this year I discussed first of all why you would want to buy Dividend Growth Stocks and then in Part 2 about Dividend Growth Stocks changing over time.
Today, I want to talk about dividend yields and dividend growth. I consider dividend yields in the 1% range and lower to be low yields, in the 2% to 3% ranges to be moderate yields and in the 4% to 5% ranges to be good. Be very careful of any yields above the 5% range as when yields are higher than 5% it often denotes a company in difficulties.
For dividend growth I think that growth per year up to the 7% range to be low, growth in the 8% to 15% range to be moderate and over 15% to be good. There is often a tradeoff between growth and yield. Generally speaking there is a stock with low yield would have a high growth rate and one with a good dividend yield would have a low growth rate.
For example Canadian National Railway (TSX-CNR, NYSE-CNI) has a yield of around 1.61% and the 5 and 10 year growth rates are 21.7% and 20.5% per year. REITs are generally good examples of high yields and low growth. For example Canadian Real Estate (TSX-REF.UN, OTC-CRXIF) has a yield around 4.02% and dividend growth of 5.0% and 3.5% per year over the past 5 and 10 years.
Banks tend to be in the middle with the Toronto Dominion Bank (TSX-TD, NYSE-TD) have a current yield of around 3.28% with growth over the past 5 and 10 years at 10.6% and 9.3% per year. Their yields tend to be moderate as do their growth.
Of course there are lots of exceptions to this. If you look at Loblaw Companies (TSX-L, OTC-LBLCF) and prior to 2004, it had low dividends (1% range) and high dividend increases (25% range). Today day their dividend is low still in the 1% range) but the dividend increases for the part 5 and 10 year is at 4.2% and 2.1% per year.
From 2006 and 2011 inclusive Loblaw kept the dividend level and in 2012 started to increase them again, but at a very low rate. The company put in a new supply chain computer system and it was more costly and took longer than expected. This tended to suppress profits for a number of years.
Some companies have dividends that they never seem to increase. If they have a low dividend yield and no increases, you can hardly call them dividend companies.
If you are young I think it is better to buy more stock with low dividend yields and high dividend growth rates. This is because you have to pay tax on any dividends received. The lower your dividend income the lower will be your taxes. When you start to live off your dividends, you will want to switch to more stocks with higher yields and lower growth.
I am currently living off my dividends and I have a mix of dividend yields and dividend growth. Also, you will find that companies over time have different yields and different growth rates.
On my other blog I wrote yesterday about Crescent Point Energy Corp. (TSX-CPG, NYSE-CPG)... learn more. Tomorrow, I will write about Finning International Inc. (TSX-FTT, OTC-FINGF)... learn more on Friday, December 1, 2017 around 5 pm.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
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