Okay, before you complain that the dividend yield on Colgate-Palmolive (CL) is only 2.3%, please remember that we’re talking about Colgate stock — a dividend stock that has made rising payments for half-a-century while killing the market on a total return basis.
Given that starting point, it’s hard to find a better forever dividend holding than Colgate stock. That’s why it makes the InvestorPlace list of dependable dividend stocks.
True, CL is up less than 1% for the year-to-date, trailing the S&P 500 by about 7 percentage points. And, yes, Colgate stock is more expensive than the broader market on a forward earnings basis — and even more expensive than its own five-year average.
But over decades of time, neither of those things is going to matter to this battleship of a dividend stock.
At 20 times forward earnings, Colgate stock looks pricey compared to the S&P 500, which trades closer to 16. Colgate stock is also trading at a significant premium to its five-year average of 17.6, according to Thomson Reuters Stock Reports.
But here’s the key if you’re worried about valuation. Price-to-earnings multiples cycle up and down through bull and bear markets, usually reverting to their mean. As long as a stock isn’t ridiculously overpriced, it won’t take a decade or more to work off the excess a la Microsoft (MSFT) in the 2000s.
As for the dividend yield being “only” 2.3% …when it comes to adding it up over decades, who cares?
First of all, on a risk-adjusted basis, a 2.3% yield is actually pretty darn good. The benchmark 10-year Treasury note currently yields 2.49, while the 7-year Treasury note yields 2.2%. Colgate competes with U.S. debt for income, and that’s because the dividend payments are all but a sure thing.
Colgate Stock Has Sepia Tones
Heck, CL has paid uninterrupted dividends since 1895. Through the Great Depression, two world wars and the Great Recession, Colgate never once missed a payment. Even better, Colgate has increased its dividend every year for 50 years.
Don’t forget that dividend hikes are an income investor’s best friend because they make the yield on the original cost basis rise far past the quoted current yield.
Here’s how: If you buy a stock at $100 with a $1 dividend, your yield is 1%. If the stock rises to $200, the company would have to hike the dividend to $2 to keep that same 1% yield. But because you bought at $100, your yield is 2% — a $100 stock with a dividend of $2.
The net result is that if you’ve got a couple of decades or more to retirement, you can reap market-crushing returns. For the 20 years ended June 30, Colgate stock generated a total return of more than 1,200%. Meanwhile, the S&P 500’s total return over the same period came to 525%.
Past performance is not an indicator of future returns, but when a company has paid a dividend since the 19th century and hiked its payouts for 50 consecutive years, you’ve got to like the odds.
With a share-price-plus-dividend history second to none, Colgate stock looks like a perfect candidate for any retirement or equity-income portfolio.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
