The sorts of companies that I used to build my portfolio (so I could stop working and live off my dividends) were dividend growth companies. The characteristic of these companies is low but fast growing dividends. When you are working, you do not need a lot of dividend income. In fact, if you have money in an unregistered account, dividends income, together with your salary could put you into a higher tax bracket.
I want to compare and contrast Chesswood Group (TSX-CHW) and the stock I am reviewing today of Stella Jones Inc. (TSX-SJ).
Dividends for Chesswood are 7.33% and for Stella Jones is 1.03%. There is the only place I see where you might think Chesswood is better. However, Stella can afford their dividends and Chesswood cannot. (It can also be a warning that a stock is not thought well of if the dividend is over 4%.)
If you look at the Dividend Payout Ratios in regards to earnings, the Ratio for Stella is 15.1% (5 year median). The same ratio for Chesswood is hard to calculate because they had earning loss years, but is around or above 100%.
As for dividend growth the dividends over the past 5 and 10 years for Stella grow at the rate of 29% and 24% per year. Chesswood has not been around that longer but the 5 year dividend growth rate is a negative 6.7% per year.
Past performance does not guarantee future performance, but if you look at the potential yield on your original investment, after 10 or 15 years Stella, with dividend growing at 24% per year would give you a yield on original investment of 9% and 25%. For Chesswood, it is hard to say. It may have dividend yield of 7.3% but dividends have not grown over 5 years.
Total dividends grew for Stella between 2011 and 2012 at the rate of 24%. For Chesswood dividends grew between 2011 and 2012 at the rate of 6.7%. Chesswood dividends grew more between 2010 and 2011 at the rate of 32.2%. The rate for Stella was slightly less at 31.6%. However, Stella has not had any dividend decreases, but Chesswood decreased dividends by 74% in between 2008 and 2009.
Another thing to look at is debt ratios, especially the Liquidity Ratio. This looks at current assets versus current liability. The ratios, as far as I can figure out as the company does not tell you, for Chesswood have a 5 year median value of 1.18. The current assets can, but just cover the current liability. What you want is a ratio of 1.50 or better. For Stella, the 5 year median Liquidity Ratio is 3.01.
Personally, I would buy a Stella Jones over a Chesswood Group stock any day. I have lived off my dividends since 1999 and I still have stocks such as Stella. This is because of the great dividend growth. My dividend income is currently growing at just over 9% per year.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.