Sometimes I think investors fail to realise just how rewarding dividend stocks can be. They might spot a company yielding, say, 5% a year, and think hey, that looks pretty good. What they don’t realise is that this initial yield is only the start.
Feel the yield
The FTSE 100 currently yields 4.1% while some stocks yield 6% or more. However, new research from online platform AJ Bell reveals that the 10 best FTSE 100 dividend heroes are effectively paying double-digit yields to investors who bought 10 years ago.
One company in particular stands out. An investor who bought shares in industrial equipment rental company Ashtead Group a decade ago is now getting income of a mind-boggling 48% a year. They would have enjoyed a total return of more than 4,250% in the time.
We can be heroes
Russ Mould, investment director at AJ Bell, has named 26 FTSE 100 ‘dividend heroes’ that have increased their payouts every year for the last decade, offering an average yield of 12%. Ashtead is top of the chart, followed by information technology business Micro Focus International with a sky-high ‘yield’ of 28.4% and a total return of 657% since July 2008. Wealth manager Hargreaves Lansdown is in third place with a ‘yield’ of 22% and a total return of 1,591%.
Given that these calculations start on July 2008, just as the credit crunch intensified, these returns are even more impressive. So what gives?
If you check today’s yield, you are not getting anything like that level of income. Ashtead currently yields just 1.41%. Micro Focus International offers 5.47% and Hargreaves Lansdown just 1.47%.
As Mould points out, we often take dividend yields as a snapshot, looking at what investors get at today’s share price. However, investing is a long-term game, and over the last decade, Ashtead’s share price has spiralled from 68p to 2,346p, a rise of 2,278%, by my own calculations. The yield may have slumped over that time, because it is expressed as a percentage of the share price, but in cash terms dividends have spiralled.
I’m a simple chap, so here’s a simple calculation to explain the process. Say you buy a stock at £10 with a dividend of 50p, giving you a yield of 5%. Management increases the dividend by a progressive 10% a year, so after a decade it has risen to £1.30. If the stock has risen to £30, new investors are getting a yield of just 4.3%. However, you have a yield of 13%, based on your original buy-in price.
The long game
The headline yield is calculated in relation to today’s share price but if you want to cheer yourself up, base your calculations on the original price you paid. The longer you hold, the higher the yield. The figures show the importance of dividends in generating long-term returns. Here’s a FTSE 100 high-yield hero to consider.
This does not mean you should rush into Ashtead and the others. Mould’s 26 dividend heroes currently yield just 3.2% on average. Also, only 13 were actually in the FTSE 100 a decade ago, so you may need to dig through the FTSE 250 listing of smaller companies to find the next generation of dividend growth champions.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown and Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.