EFERT vs MEBL – Comparing dividend yield and dividend growth

When it comes to dividend stocks, there are two main things to consider:

• Dividend Yield
• Dividend Growth Rate

Dividend yield is the percentage of a stock’s price that is paid out in dividends each year. The dividend yield is like a slice of a stock’s price that you get as money each year. 

Dividend growth rate is the percentage by which a company’s dividends increase each year. It is how much more money a company gives you each year compared to the last year.

Many people in the stock market are attracted to high dividend yield shares. KAPCO, EFERT, SPWL, and POL are among some of the higher dividend paying stocks in PSX. Their dividend yield often touches the 18%-20% mark, something that is considered good in the current environment.

There is no doubt that a 20% yield is attractive. You will have doubled your money in 5 years. While that is going to go a long way in beating inflation and devaluation, it is hardly something that will generate life-changing wealth for you.

This is where dividend growth stocks come in. People in the PSX have this tendency of ignoring stocks that have a less than 10% dividend yield. But nobody bothers to look at the underlying business or the rate at which that business is growing.

If a business is growing its EPS year after year, it is much more likely to keep giving larger dividends in the future. That increase in dividends can have a life-changing impact on your returns.

Picking EFERT and MEBL for comparison

We can do a case study of this using two stocks that are quite popular these days, namely Engro Fertilizer (EFERT) and Meezan Bank (MEBL). 

Engro Fertilizers Limited (EFERT)

A high dividend yield but low dividend growth rate stock, such as EFERT, is a good choice for investors who are looking for income in the near term. This is because a high dividend yield(and a high payout ratio) indicates that the company is currently paying out a large portion of its earnings in dividends. This can provide investors with a high level of income, but it also means that the company’s dividends are not likely to grow very much in the future.

It gives you a big slice of money right now(It pays out all of its EPS in the form of dividends), but it doesn’t increase the slice by much each year. This is nice if you need money sooner, but it might not grow a lot in the future.

Meezan Bank Limited (MEBL)

A low dividend yield but a high dividend growth rate stock, such as MEBL, is a good choice for investors who are looking for long-term growth. This is because a high dividend growth rate indicates that the company is likely to continue to increase its dividends in the future. This can provide investors with a steady stream of income that can grow over time.

MEBL doesn’t give you a big slice of money right away, but it keeps giving you more money each year. This is cool if you’re thinking long-term and want your money to grow over time.

Comparing the performance over 20 years

Here is the data for EFERT:

After 20 years, you have already received Rs. 564,6000 in the form of dividends. Your yield on cost is over 40%, meaning you’re getting 40% of your initial investment paid out to you that year alone.

Your dividend returns grew at a CAGR of 9%, which is quite good, but by no means amazing.

Now let’s take a look at what MEBL would have achieved in 20 years. (Note that MEBL’s bonus awards are not included in this study, so the actual returns from the stock are much higher. The reason for not including the bonus shares is to keep the calculations more realistic. As the company grows and can afford to pay out cash, it may stop awarding bonus shares in the future.)

After 20 years, you have already received Rs. 1,597,721 in the form of dividends. Your yield on cost is over 267%, meaning you’re getting over two and a half times your initial investment paid out to you that year alone.

Your dividend returns grew at a CAGR of 14%, a big difference from EFERT’s 9% despite having a better yield. 

To summarize, here is the amount of money you’d have collected in the form of dividends after 20 years:

While the initial income from EFERT was higher, the steady growth of dividends in MEBL led to a significantly larger return in the long run.

Conclusion

In the world of investing, there’s no one-size-fits-all approach. Your choice between high dividend yield-low growth and low dividend yield-high growth stocks depends on your financial goals and risk tolerance.

If you’re seeking immediate income, high dividend yield stocks might be more appealing. But if you’re aiming for long-term growth and the potential for larger returns, low dividend yield stocks with high growth rates could be the way to go. 

Assumptions:

It is important to note that in the real world, these returns may show a lot of volatility and in some cases may not even realize.

This article assumes that the companies’ underlying businesses will remain healthy and the company will continue to make the dividend payments as projected. The overall market performance and share price appreciation are also not accounted for.