Target or Procter & Gamble For Long-Term Dividends?

Target (TGT) has been on a tear lately with its stock price up 26% over the past year. Perhaps equally impressive is that its dividend has increased by 20% over this same time period. For investors in Target, times have been very good. 

Even with the run-up in its stock price, a case can be made that Target still offers good value for dividend growth investors looking at the long run. I want to compare its outlook vs. a favorite dividend growth stock of mine, Procter & Gamble (PG). 

Let's take a look at these two companies:

Although Target's dividend yield is lower than Procter & Gamble's, its dividend growth has been very impressive. Over the past five years they have increased their dividend by nearly 21% per year. This presents a great case study in which company will give the investor a better return due to dividends over time. More specifically, I want to measure the Yield on Cost (YOC) and how it changes over time as well as the compounded annual return due to dividends. The YOC simply measures the annual dividend divided by the original investment in the company’s stock. 

I ran the following analysis in our free calculator called Dividend Yield And Growth. I assumed that there is simply no way Target can keep increasing their dividend by 20% over the long-run so I assumed a 15% rate of dividend growth for them. For Procter & Gamble I assumed their 1 year dividend growth rate of 7% would continue. With these assumptions we see the following:

It takes only 2 years for the YOC for Target to break even with the YOC for Procter & Gamble. Of course, due to compounding we see the YOC for Target explode upward eventually. But this assumes that the company can continue its relatively high rate of dividend growth going forward.

Even more important than the YOC is the compounded total return over time. This also only takes 2 years to break even. It is also important to note that I assume no price appreciation for these stocks in the calculations and compounded returns are due solely to dividends, which are assumed to be reinvested.

It is also interesting to look at what growth rate does Procter & Gamble's dividend need to be over 20 years such that its compounded return breaks even with Target. I ran this analysis and found the answer to be 13%. 

Lastly, I have found by plugging in various dividend yields into our Retirement Planner: Dividend payers who can return just 2% more than bonds or other dividend payers can increase the time that funds last in retirement by more than a decade. The key is finding companies who will either pay a strong dividend or have serious dividend growth and have shown a culture of not cutting dividends when times get tough.