1st, I built my assumptions (inputs) that can and will be varied in the analysis:
I'm analyzing two stocks, XXX, a "growth" stock with no dividends vs. YYY, a dividend champion. Here is an example of the inputs for these two companies, from which I'll generate a spreadsheet:
In this scenario, XXX share price (=EPS Growth) will grow at a CAGR of 13% and pay no dividends, while YYY share price will grow at a CAGR of 8%, pay a starting yield of 3%, and grow the dividend at a CAGR of 5%. I'm hoping to retire 15 years from now, so I'll run the analysis for that time duration. Below is the spreadsheet I've built showing the two stocks and the final outcome in year "16," the start of my retirement (click to enlarge).
In this first scenario, the 13% appreciation trumps the the 8% appreciation + 3% initial yield + 5% annual dividend growth. At retirement (year 15) stock XXX is worth $645k vs. YYY worth $437k. If I sell all my XXX and buy as much YYY as I can, I'll have 19,716 shares paying the same dividend as the 13,800 shares in the DG scenario. More shares = more income, $11.7k vs. $8.2k. I know, I know, I can hear several respected commentators from SA saying "but your assumptions are wrong!" I agree the inputs have a huge effect, so here are six different scenarios varying the inputs. I think looking at these results, I can draw a few conclusions.
The results compare annual income from dividends in for the two scenarios in each case. Case 1 shows the positive effect of dividends vs. no dividends with same price appreciation (growth). No doubt, dividends help. Case 2 increases the growth rate from 8% to 11% for the non-dividend stock. The two outcomes are pretty close; interestingly, the 11% growth of XXX = 8% growth + 3% yield of YYY. Case 3 ups the growth of XXX to 13%, the example in the spreadsheet up above. XXX is a clear "winner" here. Case 4 increases the rate of annual dividend growth. Interestingly, both income streams benefit at retirement because the YYY stock is paying a much higher dividend in year 16, but we can still buy more shares with the XXX proceeds.
Case 5 is very interesting. By increasing my starting yield in year 1 to 5% from 3%, then growing the dividends every year by 10% vs. a growth stock at a respectable annual 13% growth rate, the dividend grower wins! This surprised me. The extra income from the higher yield, then compounded at 10% every year had a bigger effect than I anticipated. But hold on, let's look a one last case.
In case 6, I exchanged capital appreciation in YYY for yield. The 5% starting yield with a share price growth of only 5% (think utilities, or COP). The dividend grower got beaten pretty badly in this scenario.
Conclusions (my humble opinions)
- Size of the egg at retirement is the only factor of importance, not how you got there
- You can get their either way, or a combination of both ways (Growth & DGI)
- For the growth route, you have every 1% of total return makes a huge difference in the outcome.
- For the DGI route, investors need to monitor three things closely: share price growth, total portfolio yield, and dividend growth of the portfolio.
- When DGI investors in the accumulation phase say they are ignoring share price fluctuations, that is fine in the short term, but over the long haul, earnings growth and subsequent (highly correlated) share price growth cannot be ignored.
- Its really about total return on investment. If you think dividend paying, high yielding stocks will grow and give a better total return in the long run, then they are the logical choice for the portfolio.
- Maximizing yield as a goal prior to retirement, and forfeiting growth in favor of yield, results in reduced income when you retire. The only way maximizing yield before retirement makes sense, is if you believe the ultimate total return will be greater as a result.
- Michigan is going to wallop Notre Dame this weekend. Go Blue!