When applying this concept to dividend growth stocks, the calculation is a little more complicated than the simple example above due to the annual dividend increases. Nothing that can’t be quickly modeled in a spreadsheet.
Companies with a very short payback are often troubled or have been highly discounted due to the market’s lack of faith in them. At the other extreme, do you really want to wait 30, 40 or 50 years to earn back your initial investment? As a compromise, a 9 to 13 year payback should be acceptable for most long-term investors.
Once you earn back your investment, some might say you are in a no-lose situation. I wouldn’t go quite that far, but you have found an investment that that has provided you a good historical revenue stream, and hopefully it will continue to do so in the future.
This week, I screened my dividend growth stocks database for select stocks with a 9 to 13 year payback (at the current yield and dividend growth rate) and a yield between 2.5% to 6.0%. The results are presented below:
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
Yield: 2.7% | Payback Years: 12.4
Cisco Systems, Inc. (CSCO) offers a complete line of routers and switching products that connect and manage communications among local and wide area computer networks employing a variety of protocols.
Yield: 2.9% | Payback Years: 12.4
Lockheed Martin Corp. (LMT), the world's largest military weapons manufacturer, is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales.
Yield: 3.0% | Payback Years: 12.4
Cracker Barrel Old Country Store (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States.
Yield: 3.1% | Payback Years: 10.4
Target Corp. (TGT) operates nearly 1,800 Target, SuperTarget and CityTarget general merchandise stores across the U.S.
Yield: 3.1% | Payback Years: 11.9
Eaton Corporation PLC (ETN) is a diversified industrial company makes electrical systems and components for power management, truck transmissions and fluid power systems, and provides services for industrial, mobile and aircraft equipment.
Yield: 4.1% | Payback Years: 11.1
Health Care Property Investors, Inc. (HCP) is a California based equity-oriented real estate investment trust that has direct or joint venture investments in health care-related facilities across the U.S.
Yield: 5.9% | Payback Years: 13.0
Omega Healthcare Investors Inc. (OHI) is a real estate investment trust (REIT) that invests in income-producing healthcare facilities, mainly long-term care facilities located in the United States.
Yield: 6.0% | Payback Years: 9.6
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 250+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long MSFT, CSCO, LMT, HCP in my Dividend Growth Portfolio, long OHI in my High-Yield Portfolio and long CBRL in my High Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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