Here’s how you can compound dividend stocks to double the S&P 500’s return

Companies announce dividend increases all the time, but here’s one that points to a simple investing strategy that can lower your risk and make you a lot of money over the years.

Maybe it isn’t so exciting on the surface: Kroger Co. KR, +0.73%, a supermarket operator, raised its quarterly dividend payout by quite a bit, but the stock’s dividend yield, based on its closing price of $47.34 on June 22 is an unexciting 2.20%.

But what if you had purchased shares of Kroger five years earlier?

  • The stock closed at $22.56 on June 22, 2017. At that time, Kroger’s annual dividend payout was 48 cents a share, for a dividend yield of 2.13%. That’s only slightly lower than the current yield of 2.20%.
  • For five years, through the just-announced increase in the annual payout to $1.04 a share, Kroger’s dividend has increased at a compound annual rate of 16.7%. Its stock has risen 110%, and the dividend yield on shares held five years is 4.61%. The stock’s total return for the five years with dividends reinvested has been 133%, compared with a 69% return for the S&P 500 Index SPX, -0.18%, according to FactSet. That’s almost twice the return — and remember that Kroger is a grocer.

There are different ways and reasons to select dividend stocks:

  • Here’s an approach favoring quality companies that are expected to increase dividends significantly over time. The current yields might be modest.
  • Here’s a screen of companies whose stocks have high current dividend yields, and which analysts expect to generate sufficient cash to pay more.

Now let’s look back five years and see which companies in the S&P 500 have been the best dividend compounders.

Best dividend compounders

For this screen of the benchmark index, we began with companies that had dividend yields of at least 2% as of June 22, 2017. We compared those annualized payouts to the companies’ current annual dividend rates to calculate a compound annual growth rate (CAGR). That’s it, and Kroger made the top 10.

Here are the 10 stocks in the S&P 500 that had dividend yields of at least 2% five years ago, and have had the highest dividend CAGR since then:

Company Ticker Five-year dividend CAGR Dividend yield on shares purchased five years ago Dividend yield – five years ago Current dividend yield Price change – 5 years Total return – 5 years Tractor Supply Co. TSCO, +1.84% 27.8% 7.01% 2.06% 1.92% 266% 292% Best Buy Co. Inc. BBY, +1.02% 20.9% 6.37% 2.46% 5.04% 27% 46% Lowe’s Cos. Inc. LOW, +0.50% 20.7% 5.36% 2.09% 2.42% 122% 142% NetApp Inc. NTAP, -0.37% 20.1% 5.11% 2.05% 3.09% 65% 89% Regions Financial Corp. RF, -4.09% 19.4% 4.91% 2.02% 3.57% 38% 63% Texas Instruments Inc. TXN, -1.80% 18.1% 5.82% 2.53% 3.01% 93% 120% Kinder Morgan Inc. Class P KMI, -1.22% 17.3% 5.97% 2.69% 6.79% -12% 15% AbbVie Inc. ABBV, +0.15% 17.1% 7.71% 3.50% 3.82% 102% 153% Kroger Co. KR, +0.73% 16.7% 4.61% 2.13% 2.20% 110% 133% Union Pacific Corp. UNP, -0.35% 16.5% 4.84% 2.25% 2.49% 95% 116% Source: FactSet

Seven of the 10 stocks have beaten the S&P 500’s five-year return.

Click on the tickers to begin your own research about any of the companies.

And read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page — including dividend history.

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