With short-term interest rates still sitting at near 0%, more and more investors have begun to seek out companies paying a reasonable dividend yield. But as many have pointed out, including myself, it’s not just about the yield. The consistency and growth rate of the dividend are of utmost importance as well. With that in mind, let’s take a look at two solid companies with low debt, dividend yields above 4%, and a strong five year dividend growth rate above 8%.
American Greetings (AM)
Owens & Minor, Inc., together with its subsidiaries, provides distribution, third-party logistics, and other supply-chain management services to healthcare providers and suppliers of medical and surgical products, as well as distributes medical and surgical supplies to the acute-care market. Its services include logistics, supplier management, analytics inventory management, outsourced resource management, clinical supply management, and business process consulting.
*Profile information taken from Yahoo Finance.
| Ticker | Dividend
Yield | 5 Year
Annualized Div
Growth Rate | 1 Year Div
Growth Rate | Payout
Ratio | Debt/Equity |
| AM | 4.4% | 11.8% | 55.6% | 30.0% | 30.0% |
Unlike many companies with a high five year dividend growth rate, AM has surpassed this growth rate through last year; its one year dividend growth is 55.6%. AM also have a relatively low payout ratio, which means there is money left over for reinvestment in the company or to continue raising dividends further. Also, the debt to equity of this company is a very safe 30%. I always like to look at total return scenarios for companies such as AM by plugging in some numbers into my calculator called Total Returns- Dividends vs. Price Appreciation.
| | Annual Return Over 10 Years |
| | | Dividend | Growth | Rate |
| Annual % Change
in Stock Price | 5% | 7% | 9% | 11% | 13% |
| 0% | 5.4% | 5.8% | 6.2% | 6.6% | 7.1% |
| 2% | 6.7% | 7.1% | 7.4% | 7.7% | 8.1% |
| 4% | 8.0% | 8.4% | 8.8% | 9.2% | 9.7% |
| 6% | 9.5% | 9.8% | 10.1% | 10.4% | 10.8% |
The outputs in the middle show the annual total returns for a given annual dividend growth rate and change in stock price. I like to be conservative with my assumptions when projecting my own dividends. Using a 7% growth rate over the next ten years, AM would still return nearly 6% per year even if the stock price doesn’t budge.
Rocky Mountain Chocolate Factor (RMCF)
Rocky Mountain Chocolate Factory, Inc. operates as a confectionery manufacturer, franchisor, and retail operator in the United States and internationally. It produces approximately 300 chocolate candies and other confectionery products, such as clusters, caramels, creams, mints, and truffles. The company’s Rocky Mountain Chocolate Factory stores offer products manufactured at the company’s factory, products made in individual stores using company’s recipes and ingredients, as well as products, such as ice cream, coffee, and other sundries from approved suppliers.
*Profile information taken from Yahoo Finance.
| Ticker | Dividend
Yield | 5 Year
Annualized Div Growth Rate | 1 Year Div
Growth Rate | Payout
Ratio | Debt/Equity |
| RMCF | 4.7% | 8.1% | 0.0% | 66.0% | 0.0% |
RMCF has been a solid dividend payer over the past five years. However, the slowing economy has clearly caught up with this company as its one year dividend growth rate has slipped to 0%. But in its favor, this company has a relatively low payout ratio of 66% and no debt at all. Let’s look at some total return scenarios for RMCF:
| | Annual Return Over 10 Years |
| | | Dividend | Growth | Rate |
| Annual % Change
in Stock Price | 5% | 7% | 9% | 11% | 13% |
| 0% | 5.7% | 6.1% | 6.5% | 6.9% | 7.4% |
| 2% | 7.0% | 7.4% | 7.7% | 8.0% | 8.4% |
| 4% | 8.3% | 8.7% | 9.1% | 9.5% | 10.0% |
| 6% | 9.8% | 10.1% | 10.4% | 10.7% | 11.1% |
Notice that because of the higher starting dividend yield, RMCF’s total returns can equal or even exceed that of AM even with a lower dividend growth rate.
It’s important to understand how the dividend yield and growth rate interact to produce compounded returns over time. Running scenarios such as the ones I’ve shown above give users a feel for what they can expect over longer holding periods. It also shows the power of solid dividend paying stocks over time and why most people should have them in their portfolio.