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More dividends per share or less?
I’d aver the majority of income investors would answer “more.”
I would also aver most income investors want more dividends now. They buy investments with today’s high current yield in mind, giving little thought to tomorrow’s yield.
I, on the other hand, focus less on current yield and more on cost-basis yield, or potential yield. The cost-basis yield expands my focus to include the wealth effect.
If a stock yields 7% and pays the same dividend annually, the cost basis will remain at 7%. The stock that yields 3% today and hikes the per-share dividend annually will generate a higher cost-basis yield in due time. The cost-basis yield will eventually exceed the 3% current yield. It will eventually exceed the 7% yield.
Cisco Systems (NASDAQ: CSCO) and Gladstone Commercial Corp. (NASDAQ: GOOD) serve as insightful contrasts. Both are good companies; both are High Yield Wealth recommendations.
I first recommended Cisco Systems shares in April 2014. Investors could have bought Cisco Systems shares for $22.70 each. The Cisco Systems dividend, $0.76 per share annually, generated a 3.4% yield.
Gladstone Commercial Corp., a sturdy commercial REIT, paid a $1.50-per-share annual dividend. The dividend generated an 8.6% yield based on the $17.50 share price in April 2014.
Fast-forward to August 2018. Cisco Systems dividend has been increased annually. Cisco Systems pays a $1.32-per-share annual dividend today. The annual dividend increases have lifted the cost-basis yield – the yield on the initial recommendation price – to 5.8%.
Gladstone Commercial has maintained its annual dividend at $1.50 per share for the past four years. The cost-basis yield holds at 8.6%.
Now, let’s consider an equal investment in each company.
A $10,000 investment would have bought 440 Cisco Systems shares in April 2014. The same investment dollars would have bought 571 Gladstone Commercial shares.
From April 2014 through the present, a Cisco Systems investor would have collected $4.46 in dividends per share, or $1,962.40 in total. A Gladstone Commercial Corp. investor would have collected $6.50 in dividends per share, or $3,711.50 in total.
Gladstone Commercial Corp. holds an income advantage, but Cisco Systems is closing the gap. If Cisco Systems continues to raise its dividend annually and Gladstone Commercial Corp continues to hold its dividend at $1.50 per share, the gap will eventually close. The gap will eventually turn to favor Cisco Systems.
As for today, the income effect continues to favor Gladstone Commercial Corp. But we mustn’t overlook the wealth effect. It favors Cisco Systems.
Gladstone Commercial Corp. shares traded for $17.50 in April 2014. The same shares trade for $19.80 today. A $10,000 Gladstone Commercial Corp. investment in April 2014 would be worth $11,305.80 today.
When dividends are included, the Gladstone Commercial Corp. investment has generated $15,017.30 of wealth.
Cisco Systems shares traded for $22.70 in April 2014. The same shares trade for $42.30 today. A $10,000 Cisco Systems investment in April 2014 would be worth $18,612 today.
When the Cisco Systems dividend is included, the Cisco Systems investment has generated $20,574.40 of wealth – 37% more than Gladstone Commercial.
This isn’t to say that Cisco Systems was the better investment choice. It was a different investment choice. An income investor could have a need for high-yield income from the start. That investor would be rational to invest in Gladstone Commercial Corp.
But if immediate high-yield income isn’t an immediate need, don’t overlook the long game. A reliable dividend grower will not only produce more income than a sturdy, high-yield dividend payer over time, it will generate more total wealth, as well.