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Number Cruncher

The key to a quick payback on dividend stocks Add to ...

What are we looking for?

In July, we wrote about the dividend payback period. This is the time it takes for an investor to recoup his or her investment in a stock through dividends alone. In that article, we looked at U.S. stocks.

Today, as promised, we'll look at the payback periods for some Canadian companies, focusing on those with a track record of increasing dividends.

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What's a dividend payback period?

Say you bought a $50 stock that pays $2 in dividends annually. Assuming no dividend growth, it would take 25 years for you to get your $50 back through dividends alone (and you would still own the stock, of course).

If the dividend grows - as it should, if you're investing in good companies - the payback period will be shorter. The payback period is determined by two factors: the current yield, and the projected growth rate of the dividend. The higher the yield, and the faster the dividend grows, the shorter the payback period.

"The key to a quick payback is dividend growth, and the key to dividend growth is rising earnings," the Dow Theory Forecasts newsletter said in a recent article. "The knowledge that a stock's dividend stream is steadily recouping the cost of its purchase might make some investors more willing to buy and hold quality stocks."

Interpreting the table

We've listed 20 Canadian dividend stocks, along with their current yields and dividend growth rates over the past five years. The dividend payback period in the table is based on a key assumption: that the dividend will continue growing at the same rate.

In some cases, it almost certainly won't. Consider Rogers whose dividend has soared at an average annual rate of 89.4 per cent over the past five years. Clearly, that won't continue (indeed, Rogers' last dividend increase was 9.4 per cent). Another example is Shaw whose dividend has climbed 43.1 per cent annually over the past five years. That's also unsustainable.

As a result, the actual payback periods of Rogers and Shaw will almost certainly be longer - quite possibly much longer - than the numbers in the table. On the other hand, the payback periods for the banks could end up being shorter than the numbers we've calculated, if the banks - which haven't increased dividends for a few years now - get back into the dividend growth game.

The important thing to remember is that the dividend payback period rests on assumptions that may or may not come true. But it's a useful concept, because it illustrates the importance of dividends, and dividend growth, to investors. There's a lot of comfort in knowing that, even if a stock goes nowhere, the dividend cheques will keep flowing.

Remember: Don't buy a stock based on the dividend payback period alone. Smart investors research all aspects of a company before they take the plunge.

 

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