by Marc Bastow | February 6, 2013 12:36 pm
One of the best “little secrets” in investing is the Rule of 72. Roughly speaking — and for those interested in the nitty-gritty, take a look here — the rule allows investors to figure out how long it should take an investment to double.
The rule also can apply to investors wanting to know how long it will take a company to double its dividend. After all, plenty of companies increase dividends, but income investors naturally want to make their way toward stocks that increase those dividends consistently and with a brisk pace.
The basic formula: Divide 72 by the dividend growth rate (DGR) of any stock. The final number is the time (in years) it will take for that dividend to double. So, investors with a time horizon of, say, 10 years would want to find a company that they think can grow its dividend 7.2% annually during that time (72/10 = 7.2).
To help determine this, we can use a 5-year DGR, which gives us a large enough period of time to take corporate and economic ups and downs into consideration.
Using the Rule of 72, here are five rock-solid dividend payers that could double their payments within this hypothetical 10-year investment horizon:
|Procter & Gamble||PG||$2.24||3.01%||68%||10.83%||6 years|
|DGR info via Reuters|
“Could” is the operative word here — there’s a lot more to this than our simple table. Dividends are a function of revenue and earnings growth, cash flow and circumstance.
For instance, note Procter & Gamble’s high dividend payout ratio — at 68%, it pays out a much higher percentage of its earnings in dividends than its four other brethren here, as well as the historical S&P 500 average around 50%. On the flip side, PG has increased its dividend for 56 consecutive years. So, optimistically, Procter’s dividend could double in six years, but a more realistic expectation might be more modest increases over time — but increases nonetheless.
All five of these companies have a number of great traits in common: strong histories of dividend growth, wide “moats” in their respective industries, plenty of cash on hand and thick cash flow. However, if you’re looking for similar potential dividend doublers in other sectors, apply the formula to those stocks and see what you come up with.
It shouldn’t be the lone determining factor for any purchase, but it’s another good tool for the toolbelt.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT and TRV.
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