For yield-conscious investors looking to hold a stock for the long haul, there are a number of metrics to look at besides the current dividend yield.
One such metric is the company's payout ratio. The payout ratio is simply the percentage of net income a company pays out to shareholders in dividends. Typically the higher the payout ratio the less room a company has to raise its dividend. If the company becomes distressed, a high payout ratio can signal a significant cut is on the way.
Another lesser-known item to consider, particularly for long-term investors, is yield on cost. Yield on cost is the current annual dividend divided by your original cost per share. For investors holding for several years or even decades, this can be dramatic.
Consider the world's most successful investor - Warren Buffett. The Oracle of Omaha picked up shares of Coca Cola (NYSE: KO) in the late 1980s through his company Berkshire Hathaway for an average cost of $6.49 per share. While the share price has soared, Berkshire also receives an annual dividend of $1.76 per share. That means its yield on cost is an incredible 27.1%! Not too shabby.
It's not uncommon for solid businesses to distribute more and more of their earnings to shareholders through higher dividends as they mature. Bigger companies have less growth opportunities and compete in crowded markets, so they plow back less of their earnings into the company and more into your wallet. This could mean a decent dividend yield today becomes a huge yield in the future. For instance, a company that raises its dividend at an average of 19% per year will essentially double it every 4 years. That means your yield on cost will double too.
Below is a list of companies currently yielding more than 1.5% who have a history of raising their dividends but still have relatively low payout ratios. They also have total debt less than 50% of total capital and are trading with a PEG ratio of less than 1.5. The stock must also be either a Zacks #1 (Strong Buy) or #2 (Buy) Rank.
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