How Dividends Change the Game for Merck Investors


The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small differences in the short term add up to massive divergence over decades. In the end, the biggest winners don't always deliver the fattest share-price returns.

Today, I'm looking at a blue-chip stock with a generous yield -- but not the most generous of dividend increase histories.

Owning Merck in the last five years has been a tale of two returns. On the basis of straight-up price appreciation, the pharma giant has trailed its peers on the Dow Jones Industrial Average . But if you reinvested dividends along the way, you'd be slightly ahead of the game:

MRK Chart
MRK Chart

MRK data by YCharts.

Now, the difference isn't as dramatic as the dividend-powered boosts you see in Dow peers Verizon and Walt Disney , for example. The big red telecom stock's dividends turned a respectable 26.7% five-year return into a smashing 67.5% gain. The House of Mouse added another 11.6% on top of an already fantastic 62.8% price-appreciation. Both of these stocks have a tendency to raise their payouts on a regular basis. That has not been one of Merck's strong points, historically speaking.

But Merck did indeed juice its payouts recently, breaking a seven-year streak of unchanged dividends. Two modest bumps add up to a 13% increase over two years -- hardly the kind of generosity that crowns a dividend king, but a start nonetheless. For comparison, Disney raised its payouts by 25% over the same period. Verizon lagged with a tiny 8.4% increase.

MRK Dividend Chart
MRK Dividend Chart

MRK Dividend data by YCharts.

Today, Merck sports a hefty 4.1% yield -- one of the richest payouts you'll find on the Dow. But the yield used to be even stronger, rising as high as 5% in 2011 and nearly 7% during the depressed share prices of 2008's economy meltdown. Management doesn't seem terribly interested in protecting the yield, judging by the anemic payout improvements.

Can Merck beat the patent cliff?
This titan of the pharmaceutical industry stumbled into 2013 and continues to battle patent expirations and pipeline problems. Is Merck still a solid dividend play, or should investors be looking elsewhere? In a new premium research report on Merck, The Fool tackles all of the company's moving parts, its major market opportunities, and reasons both to buy and to sell. To find out more -- and get a full year of free updates -- click here to claim your copy today.

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