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SockMarket (34.55)

Dividend Growth vs. High Yield



August 11, 2010 – Comments (18)

This post is as much for others as it is for me. It is an analysis of how dividend growth stocks, and high yield, but slow dividend growth stocks perform in various types of situations. All returns are compounded annually (since that is what the tool I am using does). We will run through: good times, average (expected) times, bad times, and miserable times. Exceptional times seems to only affect a hand full of industries at a time, and it isn't possible to know which ones they will be so it is left out. Without further ado, here we go:

Typical Dividend Growth Stock

I would buy a company in a large safe company in a single industry (GIS) or a large conglomerate (PG). It the average of what I would buy would be close to the following:

Yield: 3.5%
Div. Growth (CAGR): 9%
Share growth (CAGR): 5%


Typical "High" Yield Stock

I would buy a company in a single industry, but a very safe one. Usually a utility (ED, SO, NGG). The following is the average profile of a potential purchase:

Yield: 5.8%
Div. Growth: 2.5%
Share Growth: 3%


Extreme High Yield Stock

This would usually be in a risky industry (energy mostly) and usually a medium sized company (PVR, ARLP). The profile:

Yield: 8%
Div. Growth: 10%
Share Growth: 12%


Obviously it will pay to put money in the exceptionally high yielding stocks in almost every case, except the "miserable" so I won't bother to do most math on it.


Good Times

Stocks go up more than expected, as do dividends. Dividend Growth stocks now rise 7%/yr and the dividend climbs 10.5%/yr. High Yield stocks rise 5%/yr and dividend growth is now 4%/yr. Good times last for 3 years.

Over that 3 year period each returns (with dividends reinvested):

High Yield: 11.27% (annualized)
Div. Growth: 11.28% (annualized)

If these good times lasted for a decade:

High Yield: 11.07%
Div. Growth: 11.80%


If good times lasted for 3 years and normal times for 7:

High Yield: 9.70%
Div Growth: 10.3%


Normal Times

Stocks move as expected.

Over 10 years:

High Yield: 8.99%
Div. Growth: 9.77%
Extreme: 21.1%


Bad Times

There is a stagnant market. Dividend growth stocks now raise dividends 5% and grow at 2% a year. High yield stocks are flat with no dividend raises. I justify the difference in the effect on the two by saying that I would mostly buy utilities, which are safer than consumer goods.

if the bad times last for 3 years:

High Yield:  5.8%
Dividend Growth: 5.86%

if bad times last for a decade:

High Yield: 5.8%
Dividend Growth: 6.29% 

if bad times last for 3 years and normal times last for 7:

High Yield:  8.05%
Dividend Growth: 8.39% 


Worse Times

I added this since I forgot about stagnat markets. This is a recession. Dividend growth stocks raise dividends at 3% a year now and the share price falls at 5% a year. High yield stocks do not adjust the dividend and fall at 5% a year as well. same justification as above.

If the recession lasts for a year:

High Yield: 0.51%
Dividend Growth: -1.58% 


If it lasts for a decade:

High Yield: 2.01%
Dividend Growth: 5.86% 


if it lasts for a year and normal times for 9:

High Yield: 8.12% 
Dividend Growth: 8.49% 


Miserable Times

This is a bad recession/boarderline depression. Dividend growth stocks arent. They do not raise dividends and drop by 15% a year price wise. High Yield isn't either, they have a dividend cut of 5% per year and drop at a rate of 10% per year. Extreme stocks fall at 30% a year with dividend cuts of 10% a year. Same justification as before.


if the miserable times last for a year:

High Yield: -5.04%
Dividend Growth: -12.03%
Extreme: -24.96%


If the miserable times last for a decade:

High Yield: -3.6%
Dividend Growth:-8.18%
Extreme: -10.97%


If the miserable times last for a year and normal times for 9:

High Yield: 7.51%
Dividend Growth: 7.11%
Extreme: 14.91%


Doing some quick analysis, some potential changes:

-If one was able to get another point on the High Yield stock growth rate one could easily outperform Dividend Growth stocks during all periods.

- Another point on the yield of High Yield stocks makes a huge difference

- Another point on the dividend growth of high yield stocks makes a small, but noticable difference


-Another point to the dividend growth rate of Div. Growth stocks the returns would not change much. 

- Another point to the stock growth rate of dividend growth stocks that wouldn't change much either

- Another point on the yield of dividend growth stock, however, woud make a massive difference


Based on this I would say that it pays to own a mix of extreme high yield stocks, a large percentage of your portfolio in high yield stocks, and some in the occasional dividend growth stock that presents a solid buying opportunity. To put a mathematical breakdown on it:

30% in extreme high yield stocks, with no more than 5% in any one company (except ARLP, perhaps)

50% in high yield stocks

20% in dividend growth stocks

18 Comments – Post Your Own

#1) On August 11, 2010 at 7:07 PM, SockMarket (34.55) wrote:

it should be stock, not share growth. so much for using a template and forgetting to edit it.

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#2) On August 11, 2010 at 7:13 PM, chk999 (99.96) wrote:

The one issue is that the high yield stock is probably high yield for a reason and may not keep any dividend at all in the bad and miserable scenarios. The stock may even go to zero if the company goes out of business.

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#3) On August 11, 2010 at 7:22 PM, SockMarket (34.55) wrote:


very true. And even when the company doesn't go out of business, when they struggle the first thing to go is the dividend (like NAT). It is risky for sure, and finding good companies like this is very difficult.

I figure that if I can get up to 30% in those type of companies I am doing very well, in the mean time the rest will head toward high yield and dividend growth stocks as I find them (or per the breakdown above, if I find too many deals) 

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#4) On August 11, 2010 at 10:42 PM, rd80 (95.06) wrote:

I'm curious about the source for the yields, div growth rate and stock growth rate number for your categories.  Especially the 10% div growth rate for the extremely high yielders.  I would expect many of those are REITs, MLPs or BDCs where high yields are typical, but the payout fluctuates with the performance of the assets.

Interesting write up, thanks for sharing it.   

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#5) On August 11, 2010 at 10:55 PM, goalie37 (88.83) wrote:

My real life portfolio needs some high yielders, so I've been looking at this same issue the last couple days.  One group you omitted was REITS.  Due to tax laws, REITS must pay the majority of their earnings as dividends.  I have found 2 that I think are taking a look at.

Universal Health Trust (UHT) currently yields 7.4%.  They own properties used in the medical fields.

Getty Realty (GTY) currently yields 7.7%.  They own gas stations, leasing the properties to the oil companies and convenience stores.

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#6) On August 11, 2010 at 11:59 PM, SockMarket (34.55) wrote:


the information for the first two is based off what I have bought and my target prices for future stocks. the Extreme stocks are no different, although I don't currently own any. For this I took the average of what I remembered to be NAT's growth rate, PVR's growth rate, and ARLP's growth rate, all of which I would buy. 

No set data here, and it is entirely possible that the figure is too high; I am just going off memory and estimation for the figures. However for the first two I do most of my trading in this area these days so I can be pretty sure that those figures are either entirely accurate or very close.



eh. Personally I don't like funds too much as a general rule an Re worries me right now so I will not be looking at REITS for a while yet. hence the lack of mention. Health trusts will probably do alright but general RE is far from safe right now. (I am not saying it will collapse, but I can see a case for it, which means that, at least in my mind, it isn't safe). 

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#7) On August 12, 2010 at 12:40 AM, Valyooo (34.75) wrote:

I would much rather have something like CYE than a high yield stock; capital gains are the real deal with stock (and a little growing dividend dont hurt)

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#8) On August 12, 2010 at 1:36 AM, SockMarket (34.55) wrote:


Here is why I don't like funds. CYE is a perfect example. It went public in 1998 at $11.70. It is down 40% since then. In that same time period SO, which is a behemoth of a utility is up 60%.

CYE paid $0.12 per month when it started. Now it pays $0.05. SO paid $0.34 a quarter back then. Now it pays $0.46.

funds like this are hell bent on paying a consistently high dividend to investors, so focused on this that they will liquidate some of their capital to do it. As such they almost always wind up declining in price (dividends fall too) over a long period of time.

Companies are generally run more intelligently with an eye to the future so they generally rise over the long run. that is why I prefer companies 

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#9) On August 12, 2010 at 2:53 AM, Valyooo (34.75) wrote:

I prefer companies too, but if you look at a chart like this one:;range=2y;compare=cinf+t+vz+cye+so;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

During times of uncertainty, CYE outperformed PFE, T, VZ, SO, and CINF...high yielders in 4 different fields (2 in communications just because they are higher)

During clear cut bull markets, like you demonstrated, div growth > high yield. During a bull market I want my companies growing at a fast pace and making me capital gains...the dividend is not what I am looking for. The only purpose a dividend serves to me in regards to a stock, is that it keeps the gains "Real". If a company is making tons of cash but investors are dumping it, and they start paying a dividend, people will buy it back for a "real" return.

During bull markets I want a company that makes nice capital gains and grows dividends (like VFC), during a crazy market like this I will take CYE over high yield.

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#10) On August 12, 2010 at 11:28 AM, SockMarket (34.55) wrote:


nah. all that chart shows is that it is more volitile. back in the bad bear markets (Nov 08-Mar 09) it was down nearly 50%. None of the other stocks, with the exception of PFE which is a miserable company, came close. Now it is up 20% since early 08 which is a bit more than the decent companies, which are about flat.

Still I can't justify owning a stock that falls and cuts dividends good times and bad. This chart is why I don't like it. I have included one basic very safe high yielder, and one basic safe dividend growth stock. Although I wasn't investing at the time I am guessing that is what I would have bought.;range=my;compare=so+jnj+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

note the period of massive underperformance vs. the S&P since inception. Especially from 02-07.

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#11) On August 12, 2010 at 11:48 AM, EnigmaDude (58.61) wrote:

daniel - great blog.  Wish I had more time to read and digest what you are saying.  One point to consider is your definition of "extreme" high yield.  My IRA is filled with stocks (and one bond fund) that yield > 10%.  These are mostly REITs and BDCs.  They have also mostly shown decent share price appreciation since the market lows in March 2009.

Examples include AINV (12%), MFA (10%), PNNT (10%), and HYF(10%).

I intend to hang onto these investments for 10 years or more and hopefully the dividends will support me in my old age!

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#12) On August 12, 2010 at 12:28 PM, truthisntstupid (80.27) wrote:

Great blog, daniel

I myself am gravitating towards more high-yielders.  Haven't bought any yet, and I still like stocks with a high potential for dividend growth.  But as someone who doesn't make a lot of money, the extra $25 I get from Altria every quarter makes a significant difference that week! 

Maybe I've got this backwards!  Perhaps focus on higher-yielding (but safe, as far as can be determined) stocks first, then focus on fine companies that will likely enjoy many, many more years of dividend growth!

Dividends,small but growing, have made a difference in my life.   I don't believe keeping much money in the bank is any way to get ahead anymore.  Those days are gone.

Many people are just plain stuck on capital appreciation.  They can't see that they gain no independence from the rest of the herd in pursuing it.  I don't care if my principal fluctuates all over the place if I've done my best to ensure the safety of the income I bought.  As a matter of fact, I hate it when my stocks go up.  Downward volatility is welcomed by dividend investors.  When shares in good dividend-paying companies go down but the dividend is still as safe as ever, then each of my hard-earned dollars buys more income. 

I've been sort of "ratcheting up"  my income for three years now.  I've done very well but I think if I open my mind to some higher-yielding stocks, I can do that even faster.  You've helped open my mind to that and I thank you.

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#13) On August 12, 2010 at 12:35 PM, truthisntstupid (80.27) wrote:

Just one more thing.  You are not a "bear."

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#14) On August 12, 2010 at 2:10 PM, SockMarket (34.55) wrote:


aah. my cover has been blown! how did you know I wasn't a bear?! :-)
I think you have convinced me. I am going to change my username (if TMF allows it)

I don't know that you have it backwards, but Im glad that I could open your mind to a new style of investing you are certainly welcome (btw you certainly helped with the dividend growth as well. thank you for that).

For quite a while I was one of those people stuck on capital appreciation and I would routinely lose money on 60%+ of my positions and only be positive because I made a killing on the other 40%. It seems like dividends are the way to go because even if you misjudge the value of a company and you buy too high you get paid to wait until the company grows to the value that you paid for it. And, as you said, you get more on the DRIP than you would if the stock had gone up. 

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#15) On August 12, 2010 at 2:21 PM, truthisntstupid (80.27) wrote:

Looking for some good higher-yielding stocks that offer direct stock purchase plans.  Know any?  I know of NLY, VZ, and a few other obvious ones and need more to look at.

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#16) On August 12, 2010 at 2:33 PM, truthisntstupid (80.27) wrote:

BTW, daniel, did you ever see my main argument for dividends vs capital appreciation?

It's old and largely forgotten but I think I made some good points. 

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#17) On August 12, 2010 at 3:06 PM, SockMarket (34.55) wrote:


I didn't see that blog, until now. It is an excellent writeup.  +1

As for high yielders most of what I follow is too high to buy right now (they are safe stocks and when fear hits the market they shoot up) but I would suggest:

APU, SPH, NGG (as you know), SO, ED (if you want very, very slow, stable growth), AZN (don't know much about them), 

if you want a few that are more risky:

ARLP, PVR, OKS, BWP, TNH, FGP (like APU and SPH but weaker), EXC 

this by no means comprehensive but it is a start at least

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#18) On August 12, 2010 at 3:30 PM, truthisntstupid (80.27) wrote:

Thanks, daniel.  I'll check those out!

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