In a slow-growth world, finding dividend-paying stocks that also offer the potential for decent capital gains is a task. As dividends are typically paid by mature enterprises, growth rates are often led by less-than-traditional growth stocks.
But this doesn’t mean that they can’t be good investments. On the contrary, in a slow-growth world where institutional investors are still paying up for earnings reliability, the right dividend-paying business can deliver both income (or shares) and material capital gains.
Dividend-Paying Stocks, Where Income Really Matters
I’m a big fan of the power of dividends. I’d say that any equity market portfolio, even those considered to be more aggressive in nature, shouldn’t exclude them because they’re attached to perceived slow-growth companies.
Dividend reinvestment is the key here. If you are saving for retirement, a child’s education, or some other goal, automatic dividend reinvestment can accelerate your returns as you build a long-term position in a company.
Consider Cracker Barrel Old Country Store, Inc. (NASDAQ/CBRL) which is a stock I mentioned previously for income investors to look into. The stock is currently up about 40% over the last 12 months and still boasts a three percent dividend yield.
A Dividend-Paying Restaurant Stock: The Best of Both Worlds
If you’d owned this well-known restaurant chain over the last two and half years, your simple rate of return excluding dividends would have been approximately 120%, which is decent capital appreciation for any stock.
If you had reinvested the dividends the company paid over that time period (automatically and without commission), the total return produced would have accelerated to approximately 140%, which is a material difference.
More dividends equal more shares, which equals more dividends. And the cycle continues.
In its most recent quarter, the fiscal third quarter of 2015 ended May 1, 2015, Cracker Barrel grew its revenues by 6.3% comparatively to $684 million. Comparable store restaurant sales rose 5.2%, while comparable store retail sales increased by 4.5%.
Earnings for the company’s third fiscal quarter of 2015 were $35.3 million, compared to $28.7 million, representing a double-digit gain of 23%.
The company also increased its quarterly dividend by 10% to $1.10. And management announced a special dividend payout of $3.00 per share.
These are good numbers from a mature enterprise in a slow-growth world. Still yielding around three percent currently, I wouldn’t be surprised at all if this stock kept ticking higher throughout this year. It’s certainly due for a share split after such solid capital gains.
Even with a mature brand, the right dividend-paying stock can provide solid income, which can be spent or reinvested as desired, and provide capital gains in a market where double-digit earnings growth is scarce. (See “Oil Prices: Where They’re Going and How to Profit From Them.”)
Cracker Barrel is doing it. It’s well-known, easy to understand and evaluate, and easy to keep tabs with less investment risk than other companies.
This is an example of a top-notch dividend-paying stock. You don’t have to focus on these stocks to the exclusion of other investment strategies, but rather as complementary to them as part of a diversified equity market portfolio.