Dividend yields in my portfolio range from a low of 1.26% to a high of 6.1%. 6.1% is great, but just because a company only pays out 1.26% doesn’t mean it’s a bad company. The two positions I’m referring to are AT&T and Disney. Disney is only yielding 1.26%, but recently increased its dividend payment by 4.76%. In contrast, AT&T only increased their dividend by 2%. Disney’s payout ratio is extraordinarily low, leaving ample room for growth, even in challenging times. I believe its important to mix these two varieties of dividend growth stocks in one’s portfolio. One provides high current income, while the other has the potential for more explosive growth.
Disney, for one, is in the process of rolling out Disney Plus, its streaming service. They’re also opening a new Star Wars themed park and have a plethora of new movies on the horizon. AT&T, likewise, is trying to capitalize on streaming, but is most certainly growing at a slower rate. If current trends hold, Disney could very well be paying out more on a cost basis than AT&T. For instance, Disney may be yielding 6-10% in the near future when factoring yield on cost. YOC is calculated by taking the projected future dividend income and dividing that by the initial purchase. If we’re looking backwards, we would take the current dividend income of the entire position and dividend that by the initial purchase.
If we look at AT&T I paid roughly $34/share and openly purchased 126 shares. The dividend yield, at the time, hovered around the same 5-6%. We get an initial investment of $4284. Annual dividends today now account for approximately $305. We divide $305/4284 and we arrive at a yield on cost of 7.1%. This does not take into account the value of the position today ($5100). So effectively AT&T is yielding just over 7% on the initial investment. Overall, the position is worth $1000 more, but YOC isn’t necessarily great.
Instead, let us invest $4250 in DIS at $75/share at the beginning of 2014. With the slightly more moderate growth, we arrive at a YOC of 2.4%. And this is while DIS was struggling with significant declines in ESPN. If we look at AAPL, the share price was similar, at $75, in the beginning of 2014. The YOC on a $4250 investment would now be 4.13%. Remember, yield isn’t everything! A low yield today might be a high-income producer just a few years from now. If growth trajectories hold, low current yielders like DIS & AAPL could be yielding income rivaling that of AT&T in just a few years. Therefore, I like to mix my purchases and buy both types of companies. AT&T provides nice distributions today while DIS/AAPL have the potential to provide high income in the future.
DISCLAIMER: I am long and own T, DIS, and AAPL. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.