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In 2011, McDonald's (NYSE: MCD) was the top-performing stock in the High Yield Wealth portfolio. On price alone, McDonald's returned 33%.
Factor in the $2.53 paid in dividends, and the return on McDonald's was lifted to 36.7%.
This year, it appears McCormick & Company (NYSE: MKC) will take top honors. Year-to-date, the McCormick share price is up nearly 28% – more than twice the S&P 500.
Factor in the $1.27 in dividends that McCormick will pay in 2012 and the return on investment is lifted to more than 30%.
I'm not surprised that McDonald's was the best-performing stock one year and McCormick the next. I say that because both companies adhere to an ethos that virtually ensures investor success over time – dividend growth.
To be sure, McDonald's and McCormick are perennial dividend growers. Each year they raise their payouts to investors like clockwork. McDonald's has been increasing its payout every year for the past 36 years; McCormick for the past 27 years.
Dividend growth is a remarkable and under-appreciated strategy. To be sure, dividend growth isn't exciting; it's akin to watching grass grow. But for the patient investor, it is highly profitable.
Warren Buffett, in his 2010 letter to Berkshire Hathaway (NYSE: BRK.A) shareholders, reveals just how remunerative dividend growth is for patient investors:
Coca-Cola paid us $88 million [in dividends] in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke…. Within 10 years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment.
A lot has happened since 1995, and a lot is happening now.
As I'm sure you are well aware that investors are edgy; there's a lot of uncertainty in the market. For this, we can point a sharp finger at our friends in Washington D.C., thanks to their inability (or unwillingness) to steer the government away from the dreaded fiscal cliff.
From an investor's perspective, the impending hike in dividend and capital gains taxes is what's most disconcerting. The top rate for both is 15% as I write. If the brakes aren't applied soon, the capital gains tax rate will increase to 20%, while the top dividend-tax rate will soar to a whopping 39.6% starting January 1.
There are strategies – which I explore in detail in High Yield Wealth – that income investors can use to maintain their purchasing power should dividend taxes rise. These strategies involve investments that provide tax-efficient distributions; therefore, they are good for investors who need cash now and can't shield their investments in a tax-deferred account like a 401(k)
Tax efficiency is a consideration for every investor. Obviously, the more after-tax income you can generate, the more purchasing power you possess.
That aside, there is a lot to be said for companies that perennially raise their dividends, regardless of tax considerations. As dividends go, share price is sure to follow.
Over the past 15 years (during which dividends were taxed at a higher rate than they are today), McDonald's shares have appreciated 650%, while McCormick shares have soared 840%. By comparison, the S&P 500 is up only 50% during the same time frame.
The share price of dividend growers like McDonald's and McCormick is obviously driven by revenue and earnings growth. But dividend growth matters just as much in determining value, if not more.
After all, your cash flow matters. Business growth is simply a means to an end, and the end is growth in the cash companies deliver to you. The more cash flow the investor receives the better, as Mr. Buffett figured out long ago.
At High Yield Wealth, we feature a wide range of dividend-growth investments. Some are established like McDonald's and McCormick.
Other investments, on the other hand, are just beginning to establish a dividend-growth track record. For example, Calumet Specialty Products (NASDAQ: CLMT) is up 13% since being added to portfolio in April, while Omega Healthcare Investors (NYSE: OHI) is up 27% since being added last December.
Dividend-growth investing is a proven strategy. More importantly these days, it's a strategy that works regardless of what roadblocks the D.C. politicians throw our way. That's something worth knowing, because the D.C. politicians appear intent on making other wealth-building strategies more difficult beginning January 1.