[Editor's note: In honor of the New Year, we at StreetAuthority thought it might be worth looking back at some of our most popular articles of 2012. This article was originally published on Nov. 22.]
More often than not, many investors make the mistake of looking for the highest yielding stocks when it comes to building retirement portfolios.
Instead, it's important to remember that growth in the dividend, rather than yield alone, creates the reliable, improving income stream necessary for a comfortable retirement. Dividend growth counts even more than yield because of the magic of compounding, which can turn today's modest yielder into a superstar performer as dividends build year after year.
Colgate-Palmolive (NYSE: CL) is a great example of what the power of compounding can do to a stock's yield. In the past 10 years, Colgate has grown its dividend roughly 12% a year. While Colgate shares yield close to 2% today, the yield on the original investment quickly climbs if dividends keep growing at a 12% annual pace.
Take a look at the table below to see what I'm talking about. This example assumes you purchase 100 Colgate shares at Sept. 19's $106 share price.
The Power of Compounding at Work
|1. Johnson & Johnson (NYSE:
|Johnson & Johnson is the world's sixth-largest consumer health care company and owns popular over-the-counter brands such as Motrin, Tylenol, Benadryl and Mylanta. This health care titan holds the No.1 or No. 2 position in many of its markets, has a mammoth $193 billion market valuation and 50 consecutive years of dividend growth.
Johnson & Johnson's earnings per share have grown 10.6% a year in the past decade and dividends have expanded at a generous 12.2% annual rate. The company has phenomenal financial strength as well. The cash balance exceeds $16.9 billion, long-term debt is only $11.5 billion and trailing cash flow from the past 12 months is more than $15.6 billion.
Payout of the dividend from cash flow is conservative at 43% and prospects for continued dividend growth are excellent, based on Johnson & Johnson's robust research pipeline, which includes potential new drugs for Alzheimer's disease, stroke prevention and antibiotic-resistant Tuberculosis.
|2. The Coca-Cola Co. (NYSE: )
| Coca-Cola is the world's largest beverage company and has what is arguably the world's most valuable brand. The value of the Coke brand is estimated at roughly $72 billion. In addition, Coca-Cola owns several other multi-billion dollar beverage brands, such as Fanta, Sprite, Diet Coke and Minute Maid. Ratings agency Standards & Poor's recently upgraded the company's credit rating from "A+" to "AA-" because of the stock's emerging-market performance strength.
Coca-Cola has delivered 10.1% yearly dividend growth and 9.2% annual earnings-per-share growth in the past decade. The company is committed to doubling the size of its business during the next 10 years through a strategy focused on acquisitions, product line extensions, partnerships and emerging-market growth.
Coca-Cola has a stock market value exceeding $167 billion and more cash than long-term debt. Cash flow exceeds $9 billion a year and provides better than two-fold coverage of the dividend. The company announced its 50th consecutive annual dividend hike last February when the company increased the payment 9% to a $1.02 annual rate currently yielding just under 3%.
|3. Walgreen Co. (NYSE:
|Walgreen operates 8,000 retail stores in the United States and Puerto Rico, fills more than 800 million prescriptions a year and is America's leading drug store chain. The recent acquisition of a majority stake in Alliance Boot, Europe's leading pharmacy chain, will reposition Walgreen as the world's largest drug store chain with 11,000 retail stores worldwide. Another positive development is the resolution of Walgreen's contract dispute with Express Scripts (Nasdaq: ESRX) last month, which should set the stage for revived same-store prescription volume growth.
Walgreen has raised dividends 37 years in a row and grown the dividend amount at a 19% annual rate in the past 10 years. The latest dividend hike was 22.5% in June to a $1.10 annual rate, giving the shares a nearly 3% yield.
Walgreen increased earnings per share 14% a year between 2001 and 2008, posted a 7% earnings decline in 2009, but has since rebounded strongly with earnings per share growth growing 38% last year. With $2 billion of cash, just $2.4 billion of debt and dividend payout at only 31% of earnings, Walgreen has plenty of cushion for more dividend growth.
|4. Proctor & Gamble (NYSE:
|Proctor & Gamble is the world's largest and most profitable consumer packaged-goods company. This global giant generates $84 billion in annual sales and owns 25 brands with sales that exceed a billion dollars a year. This includes familiar names such as Tide, Bounty, Pampers, Olay, Crest and Pantene. Proctor & Gamble has three times as many billion-dollar brands as its next largest competitor, and more than most of its remaining competitors combined.
P&G has delivered 12.4% annual earnings growth and 10.9% dividend growth per year in the past 10 years and is one of only six public companies that can claim 56 straight years of dividend growth. The company expects future growth to come from stepping up investments in its most profitable businesses and in high-growth emerging markets.
Proctor & Gamble has a conservative balance sheet, with long-term debt of $21 billion representing roughly 33% of equity. The company generates cash flow exceeding $13 billion a year. Dividend payout is a bit high, but still very manageable, at 46% of cash flow. Proctor & Gamble hiked its dividend 7% in April to a $2.25 annual rate. These shares yield just over 3%.
|5. ExxonMobil (NYSE:
Cash Balance: $52 billion
|Exxon Mobil is the world's largest integrated oil and gas company. The company has proven energy reserves of 24.9 billion barrels, consisting of a nearly 50/50 mix of oil and natural gas.
Exxon Mobil produces about 2.2 million barrels of oil a day and replaced 116% of its production from new reserves last year. The company has diversified operations around the world and plans to invest $185 billion during the next five years in developing new energy supplies, including 22 major projects scheduled for start-up between now and 2014.
Exxon Mobil has a 30-year record of consistent dividend growth and has raised its dividend by 7.4% a year in the past 10 years. Earnings per share growth has been even more impressive, averaging more than 20% a year over the same period. The company rewarded shareholders with a generous 21% dividend hike in April. The new annual rate of $2.28 gives shares a yield of about 2.5%.
Exxon Mobil has more cash than debt ($18 billion vs $8.9 billion). In addition, the company's cash flow generation is phenomenal, exceeding $55 billion a year, and dividend payout is exceedingly modest at just 21% of earnings. The size of dividend increases has accelerated in recent years, and steadily rising energy prices could push Exxon Mobil dividends even higher.
Action to Take --> Although none of these yields will knock your socks off, it doesn't get much safer than this. All five of these companies are leaders in their industries and have incredible track records of consistent dividend growth. In fact, some of them are mentioned in Paul Tracy's special presentation, The 10 Best Stocks to Hold Forever, which you can access here.
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