Case Study of a Stock with Increasing Dividend Payouts, Part 3 of 4
The stock of Archer Daniels Midland, and over 100 other companies, has increased its yearly dividend payout an average of 10% per year for the last 12 years. Let’s dial the future growth back and look at what happens when we model a dividend increase of 7% per year for the next 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. After 12 years of dividend growth at 7% per year we are receiving a dividend payout of $2.70 per share per year and the yield has more than doubled to 7.7%.
Next we model what happens if Archer Daniels Midland grows its dividend at 7% per year and we use each quarterly dividend to buy additional shares, we get a dividend per share of $4.09 per year after 12 years. Based on the money invested this is a dividend yield of 11.6% per year! For retirement income, a yearly 11.6% yield, or even a 7.7% 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.
In addition to the incredible dividend yield you also have 50% more shares than your original purchase. If you started with 100 shares, you now own 150 shares; if you started with 500 shares you now own 750 shares. Exponential growth is amazing!
A portfolio with an average dividend yield of 7.7% or 11.6% per year would allow monthly paychecks in retirement to occur without selling the core investments.
Key Point: The yearly % yield of your retirement funds is more important than the overall size of your retirement funds.
Question & Answer: How does Retirement Specialists diversify the dividend growth portfolio’s it manages?
We diversify in 3 ways:
We usually allocate 3 to 6% of a portfolio to each dividend stock. If a stock does well we will let it run to a larger percentage. Mutual funds are internally diversified so we allocate larger percentages to them.
We limit no more than 3 stocks to any one industry group or sector.
At different times we add bonds or CD’s to reduce the amount of the portfolio in stocks.
Next: in Part 4 we compare a dividend growth stock portfolio to a low cost index fund.
Common sense disclaimer; there is no guarantee that Archer Daniels Midland or any other stock will be able to increase their dividend at 7% per year for the next 12 years.