Low Yield, High Growth

This article originally appeared on The Div-Net on October 27, 2011.

I’m a firm believer in the dividend growth investing strategy. One of the premises behind this strategy is to invest in stocks that pay a dividend yield that offers a solid entry point with growth of the dividend that outpaces inflation. Generally, I’ll accept dividend stocks that offer an entry yield of at least 2.5% as part of my entry criteria, but I often look for at least 3% as a solid starting point. In addition, I also look for a history of growth of that dividend of at least 6% annually but prefer double digits when I can get it.

However, I’m also a person who likes to learn and stay open minded. I think it’s always a good idea to expand one’s horizons and stay open minded to opportunities wherever they can be found. Ultimately, I’m looking to make money when I invest and if money can be made I’m interested. Today I’d like to look at a few interesting opportunities that fall outside of my general entry criteria, but still offer potential opportunities. I’m going to look at three stocks that offer low entry yield, but very high growth. That high growth could turn what starts as a small yield into a very large yield on cost over a short period of time.

TEVA Pharmaceutical Industries Ltd (TEVA) (ADR)

Per Morningstar:

With headquarters in Israel, Teva Pharmaceutical is the world’s largest generic pharmaceutical manufacturer, with operations in 60 countries. Teva operates 38 finished dosage sites, 15 research and development centers, and 21 active pharmaceutical ingredient manufacturing sites. The company also develops and sells branded pharmaceuticals, including Copaxone, one of the world’s leading multiple sclerosis drugs.

TEVA is an interesting choice. Investing in TEVA means you are buying ADR (American Depository Receipt) shares, and due to such you will owe Israel taxes on your dividend. This is currently a 20% tax rate. TEVA could offer investors a great opportunity to buy into the world’s largest generic pharmaceutical manufacturer. Generic drugs will be in great demand over the long-term as more and more baby boomers retire and need medication for various health issues. By buying at today’s prices you’ll be purchasing TEVA at a P/E ratio of 11.55 with an entry yield of 1.95%. By sacrificing the entry yield a bit you’ll be landing a dividend stock that has a 5-year dividend growth rate of 22.7% and 10 years of dividend growth.  It has a low debt/equity ratio of 0.2. One risk to consider with TEVA is currency risk, as you are paid dividends in Israel’s native currency, which is then converted to the dollar. Also, it would be best to invest in this company in a taxable investment account so that you can get the taxes withheld by Israel reimbursed to you.

Becton, Dickinson and Co. (BDX)

Per Morningstar:

Becton Dickinson is the world’s largest manufacturer and distributor of medical surgical products, such as needles, syringes, and sharps-disposal units. The company also manufactures diagnostic instruments and reagents, as well as flow cytometry and cell-imaging systems. International revenue accounts for 55% of the company’s business. 

BDX is another health care pick. They have a large stable of medical products that they manufacture and distribute. This stays with the theme I outlined with TEVA: baby boomers are retiring and this large and growing older demographic provides ample opportunity for some players in the health care field. I think BDX will be another winner here as hospitals aren’t going out of business anytime soon. They are trading at a P/E ratio of 14 with an entry yield of of only 2.14%. That’s a low yield to accept, but what about the growth. Well, they have a 5-year dividend growth rate of 15.5%. They also have 38 years of dividend growth behind them. They have a low debt/equity ratio of 0.5. I think this is another opportunity that makes up for the low entry yield with the outsized growth behind it.

Visa Inc. (V)

Per Morningstar:

Visa manages a group of global payment card brands, which it licenses to financial institutions that issue cards to their customers. The firm acts as the payment processor by facilitating the authorization, clearing, and settlement of transactions on its proprietary networks. Visa maintains the largest card scheme in the world.

Visa falls outside my normal investment criteria, and because of such, I’m only keeping a light eye on this one. I think this business has one of the most recognized brands in the world and a very solid business model. They have a cash cow business with absolutely huge margins and no debt. This is a bit of a hybrid growth/dividend stock as they have a very low entry yield of just 1%, which almost isn’t even worth mentioning. The P/E ratio is also much higher than I look for at a lofty 21.56. That low dividend yield is backed by a recent hike of the dividend by 47%. They have grown their dividend for as long as they’ve been publicly traded, which has been three years. They’ve doubled their dividend in that time frame. This would probably be a smaller position for me, if I were to initiate a position.

What about you? Looking at any low yield, high growth opportunities?

Full Disclosure: None.

Thanks for reading.