In last few weeks, I have looked at dividend stocks (aristocrats and achievers) that have dividend yields of less than 2%. There is a school of thought among dividend crowd that low dividend yields will take more than 10, 12, or even 15 years to match income from high yielding CDs or money market accounts. Furthermore, when low yield dividend stocks are compared to high yield dividend stocks, considering conservative dividend growth rates, low yielding stocks will often lag by significant amount. I agree that, mathematically, there is no argument for low yielding dividend stock providing lower income. Purely based on numbers, it is always good to go for relatively higher yield dividends stocks. In general, the cut off used by dividends investors vary such as 2% absolute dividend yield, 3% absolute dividend yield, or dividend yield higher than market (i.e. S&P500 yield).
In general, I have always tried to compare dividend stocks yields to S&P500. But I have not had a minimum dividend yield floor value, below which I have not invested. Another aspect is, it is likely that the low dividend yield is perhaps due to the higher stock price which in turn could mean good quality stock. As an example, I have been holding on to LOW stock for a while now. I tend to look for quality of the dividends, risk to dividends, and core competency of the company. Let us take two examples.
- John Wiley & Sons (JW.A) is in publishing industry where there is a general concern about industry’s continued decrease in profitability. Contrary to this trend, JW.A continues to have stable gross and operating margins, generates stable operating and free cash flows. Its core competency is digital publishing that focuses on the subscriber based products. It does not have to depend upon advertising revenue alone. Notwithstanding, the low payout and low dividend yields, the company will last longer than 10 years. Therefore, I believe low dividends yield alone should not be a show stopper.
- Becton, Dickinson and Company (BDX) is another example of low dividend yield stock. The company does not have excessively high debt levels and hence, is not affected by financial turmoil. It does not depend upon the credit markets. BDX generated more than half of its sales from outside of US which seems to be recovering faster than US economy. Yes, it does have challenges such as regulatory driven change in spending patterns, health care reforms, or recession driven slow down. But these issues will affect the whole industry and not BDX alone. Contrary to general belief, BDK operates in an industry with high barriers to entry. The quality and reliability requirements for end products in this industry are among the stringent ones. It has build business around its core competency which makes me think and believe that it will last for more than 10 years.
I am still in my early thirties and have a long way to go before I stop investing. So if I think the company has some core competency, competitive advantage, low risk to dividends, and will survive beyond ten years, then I am open to invest in such low yield dividend stocks. I believe the slow steady earnings will provide capital gains and help me moderate out total returns.