Why income hunters should go for dividend compounders over high-yielding stocks

Goldman Sachs and Morgan Stanley have been two of the best dividend compounders among the S&P 500 over the past five years. – Goldman Sachs, Morgan Stanley

An investor who needs income right now has an advantage — short-term interest rates remain high and you can easily get a yield of 5% with no risk with a bank CD (if you are below deposit insurance limits). It is even common to earn more than 4% in a savings account, with immediate access to your money. But interest rates aren’t always this high. Only two years ago banks were paying next to nothing for savings accounts and CD yields were also very low.

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If your long-term goal is to build a retirement nest egg and eventually draw income from it, a good strategy for part of your portfolio might be to hold stocks of dividend-paying companies that have a record of raising their payouts significantly over time.

If you look at stocks that have high current dividend yields, some of those yields are really warnings built into the share prices. The yields are high because enough investors expect dividend cuts that the stocks are trading at relatively low valuations. If we look at the 20 stocks in the S&P 500 SPX that had the highest dividend yields 20 years ago, 14 have underperformed the index on a total-return basis, with dividends reinvested. And that excludes companies that may have dropped out of the index because of declining market valuations or for other reasons.

So today we are screening the S&P 500 for companies that have increased their dividends the most over the past five years. The yields five years ago didn’t need to be high for the best dividend compounders to show good overall results, with a strong tendency to beat the index’s total return.

For example:

Screening the S&P 500 for dividend compounders

For a new screen of dividend compounders, we began with the S&P 500 and narrowed the group to 281 stocks with dividend yields that were at least 1.5% as of Feb. 8, 2019.

Among those 281 companies, these 20 have had the highest dividend CAGR over the past five years. See the notes below the table for important information.

Company

Ticker

Five-year dividend CAGR

Dividend yield on shares purchased five years ago

Dividend yield five years ago

Current dividend yield

Five-year price change

Five-year total return

Goldman Sachs Group Inc.

GS

28.01%

5.74%

1.67%

2.86%

101%

126%

Freeport-McMoRan Inc.

FCX

24.57%

5.17%

1.72%

1.57%

228%

248%

Newmont Corp.

NEM

23.36%

4.73%

1.65%

4.80%

-1%

17%

Morgan Stanley

MS

23.16%

8.33%

2.94%

3.97%

110%

145%

Microchip Technology Inc.

MCHP

19.78%

4.12%

1.67%

2.13%

93%

109%

Lowe’s Cos. Inc.

LOW

18.04%

4.53%

1.98%

2.00%

127%

148%

Steel Dynamics Inc.

STLD

17.78%

4.75%

2.10%

1.36%

249%

292%

Invitation Homes Inc.

INVH

16.59%

4.91%

2.28%

3.43%

43%

62%

Kroger Co.

KR

15.68%

4.17%

2.01%

2.55%

63%

82%

Best Buy Co. Inc.

BBY

15.38%

6.24%

3.05%

4.87%

28%

52%

Home Depot Inc.

HD

15.20%

4.53%

2.23%

2.30%

97%

123%

Eli Lilly and Co.

LLY

15.05%

4.35%

2.16%

0.71%

515%

567%

D.R. Horton Inc.

DHI

14.87%

3.18%

1.59%

0.83%

283%

304%

Raymond James Financial Inc.

RJF

14.70%

3.36%

1.69%

1.61%

109%

127%

Broadcom Inc.

AVGO

14.65%

7.66%

3.87%

1.65%

365%

449%

Snap-on Inc.

SNA

14.38%

4.86%

2.48%

2.80%

74%

98%

Parker-Hannifin Corp.

PH

14.26%

3.65%

1.88%

1.15%

218%

245%

Deere & Co.

DE

14.10%

3.61%

1.87%

1.52%

137%

155%

KLA Corp.

KLAC

14.09%

5.49%

2.84%

0.94%

486%

534%

American Tower Corp.

AMT

13.93%

3.74%

1.95%

3.33%

12%

26%

Source: FactSet

Click on the tickers for more about each company.

Share prices and annual dividend rates have been adjusted by FactSet for any stock splits.

Most of the dividends paid by these companies are regular quarterly dividends. But Freeport-McMoRan Inc. FCX currently pays a quarterly “base” dividend of 7.5 cents a share, plus a performance-based payout, based on available cash flow according to criteria set forth at the bottom of page 11 of its Jan. 24 earnings press release . The most recent performance-based payout was 7.5 cents for a quarterly dividend of 15 cents and the annual payout rate of 60 cents reflected in the yields on the table above.

For Newmont Corp. NEM, the quarterly payout is based on spot prices for gold and on the company’s financial results. In February 2023, the company said it expected to pay total regular dividends of a dollar a share annually, based on its “reserves gold pricing assumption” of $1,400 an ounce for 2023. Continuous front-month contracts for gold on the New York Mercantile Exchange CL00 fluctuated between $1,810.80 and $2,152.30 last year. It traded for $2,046.30 early Friday. On top of the base quarterly payout of 25 cents a share, the company paid an additional 15 cents for a quarterly dividend of 40 cents over the past four quarters for the annual dividend rate of $1.60 reflected in the yields on the table above. But in 2022, the quarterly dividend rate was 55 cents and the annual rate was $2.20.

Newmont is scheduled to announce its fourth-quarter results on Feb. 22 and at that time should establish the payout range for dividends this year.

Fourteen of these 20 companies have beaten the S&P 500’s 101% over the past five years. Snap-on Inc. SNA just missed that distinction, with a five-year return of 98%.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

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