Here’s How to Compose Dividend Stocks to Double the Return of the S&P 500

Here’s How to Compose Dividend Stocks to Double the Return of the S&P 500

Companies are constantly announcing dividend increases, but here’s one that points to a simple investment strategy that can lower your risk and make you a lot of money over the years.

Maybe it’s not that exciting on the surface: Kroger Co. KR,
+0.82%
a supermarket chain has significantly increased its quarterly dividend, but the stock’s dividend yield, based on its closing price of $47.34 on June 22, is an unexciting 2.20%.

But what if you had bought Kroger stock five years earlier?

  • The stock closed on June 22, 2017 at $22.56. At that time, Kroger’s annual dividend payout was 48 cents per share, for a dividend yield of 2.13%. That’s only slightly below the current yield of 2.20%.

  • For five years, Kroger’s just-announced increase in its annual payout to $1.04 per share has increased its dividend at a compound annual rate of 16.7%. The stock is up 110% and the dividend yield on stocks held for five years is 4.61%. The stock’s total return for the five years with dividends reinvested was 133%, compared to a return of 69% for the S&P 500 Index SPX,
    +0.95%
    according to FactSet. That’s almost double the return — and remember, Kroger is a grocer.

There are several ways and reasons for selecting dividend stocks:

  • This is an approach that favors quality companies that are expected to significantly increase dividends over time. Current yields may be modest.

  • Here’s a screen of companies whose stocks currently have high dividend yields and analysts expect to generate enough cash to pay more.

Now let’s look back five years and see which companies in the S&P 500 have been the best dividend compounders.

Best Dividend Compilations

For this benchmark index screen, we started with companies that had a dividend yield of at least 2% on June 22, 2017. We compared those annualized payouts to the companies’ current annual dividend rates to calculate a compound annual growth rate (CAGR). † That’s it, and Kroger made the top 10.

Here are the 10 stocks in the S&P 500 that had a dividend yield of at least 2% five years ago and have had the highest dividend CAGR since then:

Company

ticker

Five-year dividend CAGR

Dividend yield on stocks bought five years ago

Dividend Yield – Five Years Ago

Current Dividend Yield

Price change – 5 years

Total Return – 5 Years

Tractor Supply Co.

TSCO,
+3.53%

27.8%

7.01%

2.06%

1.92%

266%

292%

Best Buy Co. Inc.

BBY,
+2.02%

20.9%

6.37%

2.46%

5.04%

27%

46%

Lowe’s Cos. Inc.

LOW,
+1.57%

20.7%

5.36%

2.09%

2.42%

122%

142%

NetApp Inc.

NTAP,
+0.23%

20.1%

5.11%

2.05%

3.09%

65%

89%

Regions Financial Corp.

RF,
-3.41%

19.4%

4.91%

2.02%

3.57%

38%

63%

Texas Instruments Inc.

txn,
-0.96%

18.1%

5.82%

2.53%

3.01%

93%

120%

Kinder Morgan Inc. Class P

RMI,
-0.61%

17.3%

5.97%

2.69%

6.79%

-12%

15%

AbbVie Inc.

ABBV,
+1.28%

17.1%

7.71%

3.50%

3.82%

102%

153%

Kroger

KR,
+0.82%

16.7%

4.61%

2.13%

2.20%

110%

133%

Union Pacific Corp.

UNP,
+0.36%

16.5%

4.84%

2.25%

2.49%

95%

116%

Source: FactSet

Seven out of ten stocks have surpassed the S&P 500’s five-year return.

Click on the tickers to start your own research about one of the companies.

And read Tomi Kilgore’s detailed guide for free to the wealth of information on the MarketWatch quote page – including dividend history.

Do not miss: Four value stock picks from a fund manager who shuns the energy sector

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