Small Yields, Big Results

Sometimes the most inconsequential dividend yields can turn out to be much more significant than once thought.

Income-focused investors often seek out the companies with the highest possible yields in industries that appear to be relatively safe, often overlooking some of the excellent growth-oriented companies with yields that on the surface appear to be inconsequential, but after further inspection turn out to be substantial over time.

Taking a look at a company such as Canadian National Railway Company (TSX:CNR), an investor who purchased shares 10 years ago at around $28 per share (adjusted for splits) would have received a quarterly dividend of $0.104, or $0.416 per year.

This yield of less than 1.5% may seem inconsequential, however when we look at this yield 10 years down the road, we can see that the 10.4-cent dividend has now grown to 41 cents per quarter, or $1.64 per year, a yield today of nearly 6% at the cost of investment in 2007.

The point of this exercise is to underscore the fact that small, inconsequential dividend yields can turn out to be substantial over time, and the growth associated with many of these companies that tend to reinvest the majority of the business’ earnings back into the business to generate higher returns on invested capital can lead to substantial capital appreciation as well as a nice yield in a few years’ time.

Yield-focused investors thus need consider the growth rate of an equity’s yield in addition to the yield itself.

Invest wisely, my friends.