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Here’s how you can combine dividend stocks to double the return of the S&P 500

Companies announce dividend increases all the time, but here’s one that suggests a simple investment strategy that can lower your risk and make you big bucks over the years.

Perhaps not so exciting on the surface: Kroger Co. KR,
+1.25%,
a supermarket operator, raised its quarterly dividend payout quite a bit, but the stock’s dividend yield, based on its closing price of $47.34 on June 22, is an underwhelming 2.20%.

But what if you bought shares in Kroger five years earlier?

  • The stock closed at $22.56 on June 22, 2017. At the time, Kroger’s annual dividend payout was 48 cents per share, which translates to a dividend yield of 2.13%. That’s only slightly lower than the current yield of 2.20%.

  • By just announcing an increase in its annual payout to $1.04 per share, Kroger’s dividend has grown at a compound annual rate of 16.7% over the five years. The stock is up 110% and the dividend yield for five-year shares held is 4.61%. The stock’s total return for the five years with dividends reinvested was 133%, compared to a 69% return for the S&P 500 Index SPX.
    +0.27%,
    according to FactSet. That’s almost twice the return — and remember, Kroger is a grocer.

There are several ways and reasons to choose dividend stocks:

  • Here’s an approach that favors quality companies that are expected to significantly increase dividends over time. Current returns could be modest.

  • Here’s a selection of companies whose stocks currently have high dividend yields and that analysts expect will generate enough cash to pay more.

Now let’s go back five years and see which companies in the S&P 500 were the best dividend compounders.

Best dividend compounders

For this benchmark index review, we started with companies that had dividend yields of at least 2% as of June 22, 2017. We compared these annualized payouts to companies’ current annual dividend rates to calculate a compound annual growth rate (CAGR). That was it, and Kroger made it into the top 10.

Here are the 10 stocks in the S&P 500 that had a dividend yield of at least 2% five years ago and have had the highest dividend CAGR since:

company

ticker

Five Year Dividend CAGR

Dividend yield of stocks bought five years ago

Dividend yield – five years ago

Current Dividend Yield

Price change – 5 years

Total return – 5 years

Tractor Supply Co.

TSCO,
+2.22%

27.8%

7.01%

2.06%

1.92%

266%

292%

Best Buy Co. Inc.

BBY,
+1.67%

20.9%

6.37%

2.46%

5.04%

27%

46%

Lowes Cos. inc

LOW,
+0.73%

20.7%

5.36%

2.09%

2.42%

122%

142%

NetApp Inc.

NTAP,
+0.14%

20.1%

5.11%

2.05%

3.09%

65%

89%

Regions Financial Corp.

RF,
-2.65%

19.4%

4.91%

2.02%

3.57%

38%

63%

Texas Instruments Inc.

TXN,
-1.05%

18.1%

5.82%

2.53%

3.01%

93%

120%

Kinder Morgan Inc. Class P

KMI,
-1.71%

17.3%

5.97%

2.69%

6.79%

-12%

fifteen%

AbbVie Inc.

ABBV,
+0.40%

17.1%

7.71%

3.50%

3.82%

102%

153%

Kroeger Co.

KR,
+1.25%

16.7%

4.61%

2.13%

2.20%

110%

133%

Union Pacific Corp.

UNP,
+0.34%

16.5%

4.84%

2.25%

2.49%

95%

116%

Source: FactSet

Seven of the 10 stocks have beaten the S&P 500’s five-year return.

Click on the tickers to start your own research on any of the companies.

And read Tomi Kilgore’s in-depth guide to the wealth of information available for free on MarketWatch’s prices page – including dividend history.

Do not miss: Four value stock picks from a fund manager who avoids the energy sector

https://www.marketwatch.com/story/heres-how-you-can-compound-dividend-stocks-to-double-the-s-p-500s-return-11655998391?rss=1&siteid=rss Here’s how you can combine dividend stocks to double the return of the S&P 500

Brian Lowry

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