Case Study of a Stock with Increasing Dividend Payouts, Part 2 of 4

 

Some discount brokers, including TD Ameritrade, allow account owners to use their dividend payments to buy additional shares without charging a purchase commission.  Because many quarterly dividend payments are small they also allow the purchase and ownership of fractional shares.  This is a positive effect that grows exponentially with time.  The stock of Archer Daniels Midland has increased their yearly dividend payout an average of 10% per year for the last 12 years.  Let’s look at what happens when we use the dividend payment to buy more shares each quarter for 12 years. 

 

Archer Daniels Midland stock currently pays a dividend of $1.20 per share per year.  With a purchase price of $35.24 per share this equates to a yearly yield of 3.4% per year.  If we forecast what happens if Archer Daniels Midland continues to increase its dividend at a rate of 10% per year for the next 12 years and we use each quarterly dividend to buy additional shares, we get a dividend per share of $6.30 per year.  Based on the money invested this is a dividend yield of 18% per year!  For retirement income, a yearly 18% yield is incredible!  Compare that to 5 year CD’s that pay 2.1% per year, compare to a 10 year US Treasury bond which yields 1.6% per year, even average Junk Bonds (high risk) only yield about 6% per year.  A low cost index fund or ETF representing the S&P 500 yields only 2% per year. 

 

A portfolio with an average dividend yield of 18% per year would easily allow monthly paychecks in retirement to occur without selling any of the core investments. 

 

In addition to the fantastic dividend yield you also have 63% more shares than your original purchase.  If you started with 100 shares, you now own 163 shares; if you started with 500 shares you now own 814 shares.  Exponential growth is amazing!

 

Key Point:  The yearly % yield of your retirement funds is more important than the overall size of your retirement funds. 

 

Question & Answer:  Is Archer Daniels Midland unique in having grown its dividend payout at 10% per year for the last 12 years? 

 

We know of 114 other companies which have done the same thing.  Some of these which we own for our clients are; Boeing, CVS Drugstores, Exxon Mobil, IBM, Omnicom Group, Schlumberger, and United Health Group. We also own Service Corporation International which has grown its dividend payout over 10% per year for the last 11 years.  We think a year from now it will easily clear the 12 year hurdle. 

 

Next:  in Part 3 we look at what happens when we use a more conservative dividend growth rate of 7%. 

 

Common sense disclaimer; there is no guarantee that Archer Daniels Midland or any other stock will be able to increase their dividend at 10% per year for the next 12 years.  This is a forecast based on past results.