Double Your Dividends in Just 6 Years

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    Published Tue, 10 Jul 2012 18:13:26 GMT on The Motley Fool


    Looking for fast-growing dividends? Consider FTSE 100 (INDEX: ^FTSE) oil services group Petrofac, which has boosted its payout by 50.3% over the past five years. Or global brewer SABMiller (LSE: SAB.L), only slightly behind at a spanking 48.1% five-year dividend growth rate.
    Yet income investors are right to be leery of such shares. While the dividend growth may be stellar, the actual starting point -- the dividend yield -- is often low.
    In Petrofac's case, the yield is just 2.8%, well below the Footsie's average yield of 3.8%. At SABMiller, it's even lower: 2.5%.
    Past performance
    Even so, Petrofac and SABMiller provide a handy reminder that investors shouldn't just go out and chase high yields. In short, never assume that two companies offering similar yields are largely the same, dividend-wise. For long-term income investors, dividend growth matters as well.
    That's because not only do healthy, growing companies often pay out sizable dividends, they also tend to increase those dividends over time.
    So when looking at a prospective high-yield investment, ask these three fundamental questions:
    Does the company have a track record of delivering year-over-year increases in its dividend?
    Better still, does it have a record of delivering year-over-year percentage increases in the dividend growth it delivers?
    Is the dividend amply covered by earnings?
    Such companies are a much, much better bet than a business that happens to be offering a high yield simply because its share price has slumped.
    Or -- worse -- offering a high yield because investors expect its dividend to be cut, and have consequently driven the share price down. As I wrote last week, the yield trap lurks for the unwary.
    Sustainable dividends
    That said, high-yield investing can be a judgment call at times, weighing yield against other factors. And undeniably, yields of 9%-10% -- as I've written -- are worrying, especially when coupled to low dividend cover.
    For me, yields of 5%-6% are far more tempting, speaking as they do to the more likely prospect of being sustained over the longer term. In such cases, it's often short-term worries regarding top-line revenues -- or simply a share falling out of fashion -- that has seen the share price sag, thus raising the yield.
    And while the dividend growth posted by such shares may be less than meteoric -- certainly not into Petrofac territory -- it can still deliver a healthy boost over time.
    Here, for instance, are three high-yield picks that do the business for me, and which boast an attractive (and sustainable) dividend growth rate as well. And yes, I hold all three.
    Company Today's Price (pence) 5-Year Dividend Growth Forecast Yield
    AstraZeneca (LSE: AZN.L) 2,919 14.9% 6.5%
    BAE Systems (LSE: BA.L) 307 10.7% 6.9%
    J. Sainsbury (LSE: SBRY.L) 310 10.6% 5.4%
    Sources: Bloomberg and Digital Look.
    Double your money
    What's more, the beauty of shares exhibiting dividend growth at these sorts of levels is that you can use the handy "Rule of 72" to see how long it will take to double your purchase yield.
    Take 72 and divide it by the expected growth rate -- 12%, for example, in the case of the average annual dividend growth over these three shares. Divide 72 by 12 and you get 6 -- telling you that it will take roughly six years to double the dividend.
    So 15 pence per share today, for instance, will be 30 pence per share in six years' time -- plus, of course, any capital growth delivered through a rising share price. All for sitting back and being patient.
    Which has to be good news.
    An expert pick
    As it happens, uber income-investor Neil Woodford -- who looks after two of the country's largest investment funds, and runs more money for private investors than any other City manager -- counts one of these three shares among his very largest holdings. And he's recently sold a substantial stake in another of these shares' most significant competitor.... Read more

    Stock name                                     ISIN Last trade   P/E Earnings/Share Dividend/Share Dividend yield
    BAE SYSTEMS P/E of BAE SYSTEMS on Bloomberg Quote of BAE SYSTEMS on CNNMoney FT.com - BA.:LSE P/E ratio of BAE SYSTEMS on Google Finance Dividend yield BAE SYSTEMS on Morningstar Dividend BAE SYSTEMS on MSN Money Dividend BAE SYSTEMS on Reuters BAE SYSTEMS dividend GB0002634946 410.00   12.4 32.62 19.50 4.76
    SAINSBURY'S P/E of SAINSBURY'S on Bloomberg Quote of SAINSBURY'S on CNNMoney FT.com - SBRY:LSE P/E ratio of SAINSBURY'S on Google Finance Dividend yield SAINSBURY'S on Morningstar Dividend SAINSBURY'S on MSN Money Dividend SAINSBURY'S on Reuters SAINSBURY'S dividend GB00B019KW72 378.20   11.6 32.39 16.70 4.42
    ASTRAZENECA P/E of ASTRAZENECA on Bloomberg Quote of ASTRAZENECA on CNNMoney FT.com - AZN:LSE P/E ratio of ASTRAZENECA on Google Finance Dividend yield ASTRAZENECA on Morningstar Dividend ASTRAZENECA on MSN Money Dividend ASTRAZENECA on Reuters ASTRAZENECA dividend GB0009895292 3383.00   11.4 296.00 117.00 3.46
    SABMILLER P/E of SABMILLER on Bloomberg Quote of SABMILLER on CNNMoney FT.com - SAB:LSE P/E ratio of SABMILLER on Google Finance Dividend yield SABMILLER on Morningstar Dividend SABMILLER on MSN Money Dividend SABMILLER on Reuters SABMILLER dividend GB0004835483 3599.50   20.1 181.00 38.00 1.06

    BAE SYSTEMS - BA.L  


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