10 By 10 Revisited: The Interaction Of Dividend Yield And Growth

Probably the most-referenced articles I have published on Seeking Alpha are those on "10 by 10." The key idea behind 10 by 10 - which refers to achieving a 10% yield on cost within 10 years - is to understand the interplay between dividend yield and dividend growth in producing income returns. A stock with a low initial yield compounding at a very fast rate will eventually surpass a stock with a higher yield that is hardly increasing at all. There will be a crossover point somewhere in the future. Once that point is reached, the initial low yielder will generate more annual income than the initial high yielder, and the gap will increase as the years pass.

A significant caution to keep in mind when doing this sort of exercise is the inherent speculation in projecting high DGRs into the future. In the real world, most companies do not maintain double-digit DGR streaks for more than a decade. I refer to the danger in projecting high DGRs out very far as "prediction risk." Your initial rate of return is fixed at the time of purchase, but the future rate of dividend growth is speculative. The higher the projected DGR, or the further out that you try to project it, the more risk that it may not actually be achieved.

Source: Seeking Alpha

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