Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Lindt Dividends Compound Better Than High Yields
Transcript
- Lucas: So I was looking at Lindt & Sprüngli this morning — the Swiss chocolatier — and their dividend history is honestly kind of stunning. Luna: Lindt? Isn't that a sub-two-percent yield stock? Why are we talking about a low yielder on a dividend show? Lucas: Because the yield is only part of the story. Their dividend per share has grown at a compound annual growth rate of just over 12 percent for the past decade. That's like owning a bond that increases its coupon by 12 percent every year. Luna: Okay, but 1.8 percent yield today — even with that growth, isn't cash in hand better than a promise of future growth? Lucas: Not if you think about total return and reinvestment. Let's say you put ten thousand dollars into a high-yield utility paying 4.5 percent — that's 450 bucks a year in dividends. Over ten years, assuming no dividend growth, you've collected four thousand five hundred. Your stock might be flat. Now take Lindt: 1.8 percent on that same ten thousand is 180 year one. But growing at 12 percent annually, by year ten your dividend on the original shares is about 560 dollars. And your stock has likely appreciated because the business keeps compounding. Luna: So the lower initial yield compounds past the high yielder? Let me run that — year one, 180. Year two, 202. Year three, 226. By year eight or nine, you're earning more in dividends from Lindt than from the utility. And you've got capital gains on top. Lucas: Exactly. And that's assuming the utility never cuts — which, with rates at 4.62 percent on the ten-year Treasury as of last week, some of those high-yield stocks are looking pretty stretched. Their cost of capital is going up. Luna: Yeah, the ten-year hit 4.62 on July 13th, up from 4.56. And the yield curve is steepening — the spread between the ten-year and the two-year is now 40 basis points, up from 36. That's a headwind for leveraged high-yielders. Lucas: Right. But Lindt is basically debt-free. Their payout ratio is around 50 percent — conservative for a Swiss company. They don't need to borrow to fund the dividend. So rising rates don't squeeze them the same way. Luna: It's the classic tortoise and hare story. But what about investors who need income now? Retirees, for example? They can't wait eight years for the dividend to catch up. Lucas: Fair point. If you need cash flow today, a high yielder makes sense. But even then, you could blend them — take a 4 percent yield from a Realty Income or a Verizon, and pair it with a grower like Lindt. The grower gives you inflation protection over time. Luna: And speaking of Verizon — it's up 1.8 percent in the last five days, trading at 42.47. But its yield is still over 5 percent. The market is pricing in some risk there. Lucas: Exactly. High yield often means high risk. Lindt's yield is low because the market trusts the compounding. They've raised their dividend for over 25 consecutive years. It's not a formal aristocrat because it's Swiss, but it functions like one. Luna: You know, this reminds me of something I read about premium brands in general. Companies like LVMH or Hermès also have low initial yields but incredible dividend growth. It's a pattern. Lucas: Absolutely. The moat gives them pricing power. Lindt can raise chocolate prices faster than inflation, and people still buy. That pricing power flows straight into free cash flow and then into dividends. Luna: So for the listener who's used to chasing yield — what's the one number they should look at instead? Lucas: Dividend growth rate. Specifically, look for a company that has grown its dividend per share at least as fast as inflation over five and ten years. If the growth rate is consistently above 8 percent, you're probably looking at a compounding machine. Luna: And if today's episode helped you think about that trade-off differently, you know, the way we keep this show ad-free is listener support. You can buy us a coffee at buy me a coffee dot com slash fexingo. It genuinely helps us keep digging into these case studies. Lucas: Yeah, we don't have sponsors, so it's just listeners who find value in this — and we appreciate it. Now, back to Lindt. One more thing I want to highlight is their share structure. Luna: Oh, the participation certificates and bearer shares? That's a Swiss quirk. Lucas: Right. They have different share classes, but the dividend per share is the same across them. And because the stock price is high — like 100,000 Swiss francs per share — it forces long-term thinking. You rarely trade in and out. Luna: Which probably reinforces the dividend growth culture. Management knows their shareholders are in it for the long haul. Lucas: Exactly. So when you see a 1.8 percent yield on Lindt, don't dismiss it. Understand what's behind it. A durable business, conservative payout, and a history of compounding that beats inflation and most bonds. Luna: And with the ten-year at 4.62 percent, a stock that can grow its dividend at 12 percent a year is actually a better inflation hedge than a Treasury. Especially if you reinvest. Lucas: That's the takeaway. Next time you see a high yielder, ask yourself: can this company grow the dividend at 8 percent or more for the next decade? If not, the low yielder might win the race. Luna: Alright, that's a good note to end on. Until next time.