As a Certified Financial Planner and host of Money Matters on WSB radio, I hear a lot of good questions from folks. Typically, clients and callers want to know whether they should be concerned with the current market, whether they should reallocate their portfolio, and whether they should adjust their long-term investment strategy.
While these questions are often unique to the person’s individual situation, so often the answer lies in the fundamental principle that investing is a marathon, not a sprint.
Take for example a recent conversation I had with an investor. Framing his question with the colorful analogy that “dividends seem to be rising at the pace of a turtle stuck in molasses,” the root of his query was how individual investors can maximize growth.
The frustrated investor pointed out that it seems like the “boom market” is really only enriching the future bonuses of senior corporate officers. He wanted to know: Will the “boom market” see a transfer of growth via increased dividends and/or salaries to middle-income workers? Is there any light on the horizon for a widespread dividend increase from all these corporations enjoying this “boom?” And, perhaps most importantly, how can “the little guy” investor maximize growth in his or her portfolio?
Excellent questions that hit on some key issues. Let’s break it down.
Increases in dividends are a healthy sign of growth that we’re always on the lookout for. One investment vehicle that tries to reap dividend growth is the exchange traded fund SDY. SDY is an ETF that holds approximately 100 dividend-paying companies from the S&P 1500 Composite Index. In order to be part of this ETF companies must have managed to increase dividends for at least 20 consecutive years. But, in all fairness, often those dividend increases are, yep, often slower than a turtle in molasses.
If we look at the individual companies of the SDY, we can get a bit more insight into what’s really happening.
Take Chevron, for example. The company recently increased its dividend from $4.28 per share to $4.32 per share. This increase didn’t blow anyone out of the water, but it’s an increase nonetheless. And over time, increases like this add up.
Since 2014, Con Ed was paying $2.52 per share. Today, the company is paying $2.76. Over the same period of time, Caterpillar went from $2.40 per share to $3.12 per share. Not too shabby.
Recently, Caterpillar raised their dividend by a penny a share per quarter. This may seem like chump change, but let’s do the math. Caterpillar has about 600 million shares outstanding. At a one-penny per quarter increase, we’re looking at an additional four cents per share. Four cents per share tallies to a $24,000,000 increase in what this company pays out to investors, and that’s on top of the existing dividend. Today, Caterpillar’s $3.12 per dividend payout totals to almost $1.9 billion per year.
Of course, any discussion of dividends would be incomplete without pointing back to the concept of yield at cost. Simply put, the yield at cost is an investment’s annual dividend divided by the original purchase price of the investment. This metric helps us illustrate in real numbers how much we’re currently receiving in relation to what we started with.
The idea of yield at cost serves as an important reminder that we as investors don’t purchase dividend stocks solely for the purpose of garnering dividends payouts. Instead, the goal is to secure a healthy mix of the quarterly dividend payments and appreciation of the underlying stock price over time.
In short, when we take a look at some of the top holdings in the SDY, it’s clear that dividend growth is happening. Increases are there; some are just more noticeable than others. But none will be dramatic. Investors don’t grow wealth over night – it’s a process that unfolds over time. And in the investment marathon, slow and steady wins the race.