Last week, I gave a midyear update on our dividend stock portfolio. It’s lagging behind the S&P500 index a bit, but it’s on par with Vanguard Dividend Appreciation ETF (VIG.) Our dividend yield so far in 2013 is 2.47%. This should go up by the end of the year because many stocks are scheduled to pay dividends in Q4.
Anyway, many of the comments I received suggested that I shouldn’t focus on the short term performance. Erich said that I should calculate the dividend based on my cost. I haven’t done that before so I thought I’d try now to see what it would look like. I’m not sure what the technical term for this is, so I’m just calling it “cost based dividend” for now.
The idea is that solid dividend companies will increase their dividend payout over time. If you hold their stock for the long term, then your cost based dividend should be higher than the current dividend yield. I have only been a dividend investor for a couple of years, so most of my dividends haven’t had a chance to grow yet. Let’s take a look at a few stocks anyway.
It’s actually a bit unfair to look at Intel. My Intel stocks are all from stock grants or the employee purchase plan. The overall cost is much lower than the current market price and this makes the cost based dividend very attractive. Intel is my biggest position so I thought we should go over it.
My cost per share was around $9 and this pushed the cost based dividend to nearly 10%. Intel stock price isn’t really going anywhere, but a 10% dividend is pretty awesome. I know it’s a little unfair because my cost was so low, but you could have purchased Intel in 2009 for $12.50. At that price, your cost based dividend would be 7.2%. That’s not quite as good as 9.88%, but you can’t get that kind of dividend from any solid blue chip company if you buy today. You need to get in at the right valuation and hold for the long term.
Shell is my second biggest position and it’s doing somewhat worse. I had Shell (RDS-B) for about 2 years now. The current price is lower than my cost so this is a loss at this point (not counting dividend).
As you can see, I’m down about $4 per share. Surprisingly, the cost based dividend is not that far off from the current dividend. This is because Shell increased their dividend over the last two years from $3.36/share to $3.6/share. Hopefully Shell will recover at some point and my cost based dividend will increase accordingly.
A few more stocks
Here are a few more stocks in my portfolio that has pretty good cost based dividend yield.
These companies have a long track record of increasing their dividend, so my cost based dividends should keep increasing the longer I hold these stocks.
How to increase your dividend yield
So what have I learned? There are two ways to maximize your cost based dividend.
Buy when the stock is down. When the company recovers, it usually will raise the dividend to reflect the stock price. Of course you need to do some research and predict if the business will recover. Some companies never recovered from the housing bubble market crash, but most solid blue chip companies have bounced back nicely since then.
Buy dividend growth stocks. Select companies with a long track record of raising their dividend. Here is a site that I found very useful – Dividata. You can see the dividend history of the stocks you’re interested in.
Time: You also need to sit tight for a while and let time to do its magic. I said effortlessly, not fast.
Keep in mind that I have only been investing in dividend stocks for a few years. I’m still trying to learn more and figure out how to invest for the long term. Dividend growth stocks are great because with the right company, your yield will keep increasing every year. If all goes well, then in 10 years, my cost based dividend should be quite reasonable. Dividends also get preferential tax treatment so that’s a nice bonus.
Do you like dividend growth stocks? Am I missing anything? Wouldn’t it be great to get 10% dividend yield on all your investments?
S&P 500 Dividend Aristocrats: Companies in the S&P 500 that increased their dividend payout for 25 consecutive years. See the full list of Dividend Aristocrats at Wikipedia.
Disclosure: I’m long on all the stocks mentioned in this article.