More dividends or less dividends?
I would aver the vast majority of income investors would answer “more.”
I would also aver the majority investors want more dividends now. They buy investments with high current yield. They give no thought to the yield of tomorrow.
I offer an alternative mindset.
IThe cost-basis yield more accurately reflects your income and wealth position.
If a stock pays a dividend to yield 6% and pays the same dividend year after year, I know my cost-basis yield will remain 6%. But a stock that pays a dividend that yields 3% today and hikes the dividend annually will produce a higher cost-basis yield.
In time, the 3% current yield will rise to yield 6% on my cost basis.
Cisco Systems (NASDAQ: CSCO) and Gladstone Commercial Corp. (NASDAQ: GOOD) – High Yield Wealth recommendations both – serve as insightful dividend contrasts.
Cisco Systems has been a High Yield Wealth recommendation since April 2014. I first recommended Cisco Systems shares when they were trading around $23. Cisco Systems paid a $0.76-per-share annual dividend in those early days. The dividend generated a 3.3% yield on the market price.
Fast-forward to 2019 and Cisco Systems pays a $1.32-per-share annual dividend. Cisco Systems has increased the dividend at an 11.7% average annual rate since my initial recommendation.
Continual year-over-year dividend increases have lifted the cost-basis yield to 5.8% based on the $23 initial buy price. Cisco Systems’ dividend (and its dividend yield) has nearly doubled the initial yield on offer five years ago. (The dividend increase that is sure to occur in 2019 will double the dividend and the dividend yield).
Cisco Systems’ dividend and dividend yield have nearly doubled. The share price has nearly doubled, as well. A $23 Cisco Systems investment in April 2014 is worth roughly $43 today. The current yield today is close to the current yield in April 2014.
Now, let’s consider the high-yield dividend strategy.
Gladstone Commercial Corp., a commercial real estate trust (REIT), has been a High Yield Wealth recommendation longer than Cisco Systems. I first recommended Gladstone Commercial share in Sept. 2012.
Gladstone paid a $1.50-per-share annual dividend in 2012. It pays the same annual dividend today.
Gladstone shares traded around $18 when I first recommended its shares more than six years ago. The dividend generated an 8.4% yield on the initial buy price.
Fast-forward to 2019, and we find Gladstone shares trade near $18. The dividend yields 8.4% today as I write. The cost basis yield is equal to the current yield. Little has changed since late 2012.
Gladstone Commercial Corp. still holds an income advantage, but Cisco Systems is closing the gap.
If Cisco Systems continues to increase its dividend annually (and it will) and Gladstone Commercial Corp. continues to hold its dividend at $1.50 per share (which is likely), the gap will eventually close. The gap will eventually turn to favor Cisco Systems.
As for today, the income effect continues to favor Gladstone Commercial Corp. But we mustn’t overlook the wealth effect. It overwhelmingly favors Cisco Systems.
Is this to say that Cisco Systems is the better investment?
No, Cisco Systems is a different investment. An income investor could have a need for high-yield income from the start. Gladstone distributes its dividend in monthly increments (at $0.125 per share). Bills arrive monthly, and so do Gladstone dividends.
But if the need for immediate high-yield income is less pressing, the long game is worth considering in your dividend strategy. A reliable dividend grower will not only produce more income than a sturdy, high-yield dividend payer over time, it will generate more total wealth, as well.
More dividends or less dividends?