How to Find the Best Dividends
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Is a stock with a 3% yield and a 9% dividend growth rate better than one with a 7% yield and a 1.5% dividend growth rate? Last week we looked at yield-on-cost (YOC) and how it can be used to track the progress of a growing dividend of an individual stock. However, it is not a good metric for comparing multiple dividend stocks with each another. For this I devised a metric I call NPV MMA Differential. Calculating A Dividend Stock’s NPV MMA Differential The basis of this calculation is a hypothetical $1,000 investment in a stock and a Money Market Account (MMA) earning earning a 20 year average rate (I use a 20 year Treasury as a proxy). The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at the calculated dividend growth rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. The dividend growth rate used is calculated as the minimum dividend growth rate of the 1, 3, 5, 7, 10 year dividend growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.Complete Story »
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