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.

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8 Comments

  1. Mantra, a related company to V is Mastercard which just reported good earnings. I think these are easy buys, it doesn’t take much imagination to think that in 10 years these companies could be worth 5-10 times more than now.

    Inflation is causing movement to credit, among other trends. It wasn’t too long ago that McDonalds starting accepting credit.

    sfi

  2. I bought Visa last year on a 15% dip after reports the government was “considering” imposing stricter laws on debit cards. Seemed like a poor reason to dump the stock of such a strong brand and a great time to capitalize on what was, in my opinion, a ridiculous dip.

    Fast forward 12 months and I’m up 35%. The dividends are incredibly modest, even after nearly doubling, but it’s difficult to imagine that Visa will not be around even 40 to 50 years from now. It’s such an iconic and recognizable brand.

    Long: V

  3. Nice list mantra, I own two of the three companies. I like dividends, but I also like growth. As an investor, why can’t we have both?

    I don’t think you can go wrong with the generic business model. TEVA is a great company, however the foreign tax withhold policy irritates me. PRGO is my alternative for TEVA. I just wish PRGO’s management would increase the dividend like Visa. They’re pretty conservative with the dividend increases since they’re in the growth phase.

  4. sfi,

    I’ve looked at MA from time to time, but the lack of dividend growth bugs me. V seems to be setting a long-term trend early on with the dividend growth. If the share price doesn’t explode they could soon be sitting on pretty decent entry yields. V has also vastly underperformed MA year-to-date. They both seem like reasonably good investments though. You can’t go wrong with either, in my opinion…but I’m a bit more inclined toward Visa.

    Thanks for stopping by!

  5. Henry,

    I agree. Why not have both? I like to have my cake and eat it too! 🙂

    TEVA does, unfortunately, have a withholding tax on its dividend as Israel withholds part of it. You can reclaim this dividend on your taxes, so you don’t totally lose it. It’s just that you have to wait until tax time to collect the full amount. This is true if you hold it in a taxable account, but untrue if you hold it in a tax-advantaged account like an IRA. The worst part about the withheld taxes is the fact that its yield is so low. This is a lot easier to swallow on holdings like TEF where the yield is high enough to keep me satisfied until tax time to collect the rest.

    You’re long on V. Has it treated you well? What do you think of the current price as an entry point?

    Best wishes!

  6. Pey,

    I agree and I can’t imagine that this company isn’t around for many, many years to come. They have a cash-cow business with high margins. It’s a wonderful business model really. I’ve looked at it a couple times and always went in different directions due to my entry yield criteria, but the recent hike leads me to believe that they would like to be a shareholder friendly company going forward. V is definitely on my watchlist.

    Take care.

  7. Henry,

    Great job on V. I think I can agree with you on the valuation. It’s valuation actually is pretty fair for a growth stock. I’d probably make a stab at it, but the entry yield has kept me on the sidelines so far. We’ll see.

    Good question. I do not automatically reinvest dividends through a DRIP. I discussed this a little while back. I let the dividends accumulate over the course of a month, then combine the received dividends with fresh capital (from my paycheck) and make a purchase with the combined sources of cash. This works best for me.

    Keep in touch!

  8. V doing well for me. I initiated a position at $79.95 and then again this week at $90.45. So my average cost basis is around $85-ish. I like V below $90. The stock is trading at a P/E of 17.53 and forward P/E of 15.96. I think it’s fairly priced.

    Just curious, do you automatically reinvest your dividends when you receive them. Or do you let them accumulate and then do a large purchase?

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