Plenty of investors judge a stock’s dividend by one thing: the current yield. It’s a key figure, to be sure, but it’s just a starting point. If you’re investing for the long haul, dividend growth is way more important.
To see how focusing solely on current yield distorts the payout picture, take a look at Microsoft Corp. (MSFT). The stock currently boasts a 2.6% dividend yield, just above the S&P 500 average of 2.2%.
That’s not bad, but it masks the 125% boost in the company’s dividend over the past five years: if you’d bought MSFT back then, when the stock was trading around $25.70—roughly half of today’s level—you’d already be banking a 5.6% yield on your initial buy.
Before you ask, no, I don’t recommend buying Microsoft now, despite its glowing dividend history. That’s because the software giant’s payout hikes could be a lot smaller in the next five years than they were in the last five.
Why? For one, its payout ratio has broken over 100%, which means it’s paid out more in dividends in the last 12 months than it’s earned—never a good sign for future increases.
Continue to read to find out those three…