Dividend investors typically look for a decent yield and earnings sufficient to comfortably cover the cash handout — and there’s a nice handful of shares out there yielding 5% or more and with enough cash coming in to keep the risk low.
But if you’re looking to buy shares today for the income they will provide in 20 years time and more, then there’s a statistic that many investors overlook — and that’s the rate at which a firm’s annual cash payment is rising. A nice yield today that’s rising with inflation is great if you’re already retired, but if you have decades left before you’ll need the cash, you could do a lot better with a rising star than with an established cash-cow.
A growth share!
That’s why, perhaps surprisingly, I think ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is a company that long-term seekers of dividends should consider. Sure, it’s a growth share that’s only yielding about 1% in annual cash — but every growth share is ultimately only worth the stream of cash it can potentially pay out one day.
We only have to look at ARM’s recent dividend growth to see what I mean. Here’s a look at the chip designer’s last four years of dividend increases and cover by earnings, together with forecasts for this year and next:
| Year | Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2010 | 2.90p | 0.7% | 3.22x | +19.8% |
| 2011 | 3.48p | 0.6% | 3.65x | +20.0% |
| 2012 | 4.50p | 0.6% | 3.32x | +29.3% |
| 2013 | 5.70p | 0.5% | 3.66x | +26.7% |
| 2014 (f) |
6.70p | 0.8% | 3.46x | +17.5% |
| 2015 (f) |
8.30p | 1.0% | 3.42x | +23.9% |
Most people wouldn’t look beyond the yield column, and they wouldn’t be impressed — but just look at those year-on-year rises!
Soaring effective yield
The thing is, they’re masked by a strongly-rising share price that is keeping the yield so low it’s being overlooked. But if forecasts prove accurate, by 2015 we’ll have seen a near-trebling of the dividend in just five years.
If you had bought ARM shares at the beginning of 2010, you’d have been able to get them for about 178p, and your dividend would have provided you with a yield of around 1.6% that year (the 0.7% in the table above being based on the year-end share price).
Now look to 2015, and that predicted 8.3p per share would provide you with an effective 4.7% yield on the 178p price you’d actually paid for the shares — and that’s almost up there with the dividend big-hitters like National Grid and J Sainsbury! (Of course, the shares would have nearly five-bagged to today’s 873p, but that’s just a bonus).
Should ARM’s dividend climb continue at the same pace over the following five years, you’d be ending 2020 with a cash handout of 23.8p per share.
Double-digit yield
That would provide a modest 2.7% yield on today’s share price (but still not a bad one if you expect ARM’s growth to continue for significantly longer than that). But on the original 178p per share you’d have paid in early 2010, you be raking in a yield of 13.4%!
The lesson is — if you’re looking for the highest dividend yields for 20-years in the future and beyond, seek out today’s best growth candidates.
