Posted by BM on May 6, 2022
Yield on Cost, or as we prefer to define it, Growth Yield, is the one of the best ways to measure dividend growth investing success. We will show you how you can also use this metric to build a powerful DGI portfolio.
First, a couple of definitions:
- Dividend Yield is the current annualized dividend divided by the current price of the stock
- Growth Yield is the current annualized dividend divided by the original cost basis of the stock
In other words, Dividend Yield is your current yield, and Growth Yield is the yield you are now making, on dividends alone, from your original investment sometime in the past.
Using both a historical and estimated Growth Yield, we have found that you can reliably construct powerful DGI portfolios.
As mentioned before, dividend growth investing is a risk reduction strategy that leads us to the highest quality companies. The Growth Yield metric is one way to get there.
First, we need to decide on the minimum Growth Yield we would like to achieve after ten years of holding the stock. This is a personal decision based on your own objectives. We like a minimum average Growth Yield of 7% in our Magic Pants Wealth-Builder Portfolios.
The first thing we do is look at the company’s historical record and how it has performed over the last decade, keeping our minimum Growth Yield in mind. The historical Growth Yield calculation is an easy one. Start with the current annualized dividend and divide it by the stock price ten years ago. If the Growth Yield is greater than 7% you now have a candidate for further analysis.
Next, we estimate if this type of dividend growth is likely to continue. Estimating Growth Yield ten years out can be calculated by taking the current (or starting) dividend yield and multiply it by the average annual forward dividend growth rate to the power of the period in question (5 for the next five years, 10 for the next ten years). We will use ten years for our demonstration.
Forward dividend growth rates can be a little trickier. Some companies, like Telus (T-T) for example, publish their estimated dividend growth rates in their earnings reports.
“Telus intends to target ongoing semi-annual dividend increases, with the annual increase in the range of 7-10% from 2023 through to the end of 2025.” May 6, 2022, Q1 Earnings Report
If company estimates are not available, you can always look at the recent past (1-5 yrs) and estimate a forward growth rate.
For now, we will use 7%, as it is in line with their guidance and Telus’ five-year average dividend growth rate.
Historical Growth Yield calculation for Telus (T-T)
Current Dividend (2021) / Price Jan. 1, 2012 = Historical Growth Yield
$1.26/$14.32 = 8.8%
Estimated Growth Yield calculation for Telus (T-T)
Current Yield (Jan. 1, 2022) * Average Annual Forward Dividend Growth Rate ^ Period = Estimated Growth Yield
4.2% * 1.07 ^ 10 = 8.2%
In this case, Telus meets both our minimum Growth Yields (historical and estimated).
Purchasing companies at a ‘sensible price’ is still essential in our process, and you should not blindly add positions based on Growth Yield alone. Valuation at the time of purchase will improve your future performance.
Assembling a portfolio with an average Growth Yield of 7% or better (some lower and some higher) is achievable from companies on ‘The List’. Conduct your own analysis with all the stocks on ‘The List’, establish a ‘sensible price’ to enter a position, determine your position sizes based on quality ratings, and start building a powerful DGI portfolio.
For those who need more coaching, subscribe to the blog and build your portfolio alongside ours, including DGI Alerts when we buy/sell our quality dividend growers.
