Dividend Reinvestment In These Stocks Will Double Your Money!
Anjali is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most investors love dividends as they provide the investors with cash to pay their bills. However, reinvesting dividends, rather than spending them, is almost always the best choice during one's working years. Reinvesting dividends helps you obtain shares at varying price points. When prices are low you buy more shares, and when prices are high you buy fewer shares so you are regularly dollar cost averaging back into your investment. I suggest long-term investors to choose consistent dividend providing companies with strong balance sheets and rising cash flows. McDonald’s (NYSE: MCD) and Philip Morris (NYSE: PM) are two high quality dividend stocks that came to my mind. Both McDonald’s and Philip Morris have a strong history of steady dividend payouts and have recently announced a substantial increase in their quarterly dividend amounts. The forward dividend yield of McDonald’s and Philip Morris stands at 3.33% and 3.70% respectively, and their five year annual expected earnings growth rate is 9.20% (for McDonald’s) and 10.04% (for Philip Morris). Let’s analyze how much return we can expect from these stocks by reinvesting dividends. While calculating the total return, I have made the following assumptions.
- Forward PE is assumed to be constant and thus, the stock price appreciation is just a function of earnings growth.
- The earnings are assumed to grow as per consensus estimates for next five year annual growth rate.
- The dividend yield (dividend as a % of stock price) is assumed to remain constant.
McDonald’s Corporation
Over the past decade, McDonald's has grown free cash flow at a compound annual growth rate of 17.5% which demonstrates the phenomenal cash flow generating power this company exhibits. As a result, McDonald’s has managed to boost dividends at an average annual rate of ~27%. McDonald’s performs relatively consistently and usually maintains a fair valuation over long term. The following table provides the expected return over the next six years if we buy McDonald’s at the current price ($92.5) and reinvest dividends.
|
|
Stock Price (in $) |
Dividend (in $) |
Total Return |
|
2012 |
92.5 |
|
|
|
2013 |
101 |
3.08 |
12.53% |
|
2014 |
110 |
3.36 |
26.52% |
|
2015 |
120 |
3.67 |
42.13% |
|
2016 |
131 |
4.01 |
59.54% |
|
2017 |
144 |
4.38 |
78.95% |
|
2018 |
157 |
4.78 |
100.59% |
We can see that the combination of dividend yield and the annual expected earnings growth rate should allow dividend re-investors to more than double their money in 6 years. McDonald’s has underperformed the broader markets this year and the share price has seen a ~8% correction. I think that represents a good entry point for long term investors to buy this stock and reinvest dividends for healthy long-term rewards.
Philip Morris International
Since its separation from Altria, Philip Morris has paid substantial dividends to the shareholders. Although Altria Group provides a better dividend yield, it is merely a result of a higher payout ratio. While Altria Group is struggling with declining cigarette consumption trends in U.S., Philip Morris is truly an international brand and has ample growth opportunities in many Asian markets. Even if we go by consensus estimates for future growth, Philip Morris has a far better expected growth rate than Altria Group.
The company has been steady improving its profitability over the past three years and its profit margin now (27.66% ttm) stands above Altria Group (25.68% ttm). The company generated over $10 billion of operating cash flows in 2011 and a free cash flow ratio of 90% indicates the firm’s low capital expenditure. Thus, the profitability is increasing and the firm has strong financial position. The following table provides the expected return over the next six years if we buy Philip Morris at the current price ($91.7) and reinvest dividends.
|
|
Stock Price (in $) |
Dividend (in $) |
Total Return |
|
2012 |
91.8 |
|
|
|
2013 |
101 |
3.4 |
13.74% |
|
2014 |
111 |
3.74 |
29.24% |
|
2015 |
122 |
4.12 |
46.70% |
|
2016 |
135 |
4.53 |
66.36% |
|
2017 |
148 |
4.99 |
88.50% |
|
2018 |
163 |
5.49 |
113.40% |
Thus, Philip Morris is also a great stock to hold for long term as investors can gain as much as 113% over the next 6 years. Moreover, I think the consensus estimates for future growth doesn’t reflect Philip Morris’ huge long term growth opportunity in Asia.
To conclude, I think both McDonald’s and Philip Morris are stable businesses and provide a long term investment opportunity. With further expansion into emerging international markets, both McDonald’s and Philip Morris will continue to see strong growth, and reward shareholders with dividend hikes. Reinvesting dividends is a smart way to go as it adds another level of compounding. Thus, I recommend investors to follow this strategy and hopefully double their money in six years.
AnjaliPaliwal has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
