Learn more about Dividend Paying Stocks

Dividend Stocks Pay You to Own Them

Consider that $10,000 invested into the S&P500 between 1926 and 2004 would have grown to a little over $1,000,000 without dividends. This is not bad, but with dividends reinvested, that same amount would have grown to a little over $24,000,000! The power of dividend reinvesting and stock splits over time is amazing!

Think about owning a diversified portfolio of stocks that pays you to invest, in the form of dividends. Do you own a credit card? Well then you probably understand how fast interest expense can add up, becoming a financial nightmare. The opposite is true with dividend investing and how fast your dividend income can add up. Even better, when dividend paying companies you own increase their dividend payouts, your income increases! There are many questions to ask when investing in dividend paying stocks some of which are:

  • How long has the company paid dividends ? (Check the dividend yield and history)

There are amazing dividend paying companies such as Colgate Palmolive (NY:CL) (yield 2.0%) that have paid dividends every year since 1895 or Proctor & Gamble (NY:PG) (yield 1.9%) since 1891. These tremendous dividend histories confirm the companies’ commitment to paying dividends. Normally dividend histories of 5 to 10 years plus are considered good.

  • Are the dividends sustainable ? (Check the dividend payout ratio)

There are companies which have good dividend payout ratios like 3M (NY:MMM) which pays out 40% or Johnson & Johnson (NY:JNJ) which currently pays out 38%. The payout ratio is a tool that helps investors determine if the company has sufficient funds for maintaining dividend payouts. Normally a payout ratio below 70% is acceptable.

  • Are the dividends growing ? (Check the dividend growth rate)

There are companies, such as Sysco (NY:SYY) that have raised its dividends by over 400% during the 10 year period from 1995 to 2005. Sterling Bancorp (NY:STL) raised its dividends over 500% during the same 10 year period! Normally dividend increases that exceed inflation are considered good.

A potential investing strategy is to buy a diversified basket of high quality dividend payers which consistently raise their dividends. Reinvest the dividend income you receive to buy more shares and repeat the cycle to create your own dividend compounding money machine.

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Dividend Increases Power Dividend Yields

Why do dividend increases matter?

Take a hypothetical $10 stock that pays a $.50 annual dividend. You invested $100,000 and you own 10,000 shares. The dividend rises 10% a year and the share price increases equally by the same percentage:

Year
Stock Price$
Dividend$
Current
Yield%
Yield on
Cost%
Annual
Dividends Paid$
1
10.00
.50
5.0%
5.0%
$5,000
2
11.00
.55
5.0%
5.5%
$5,500
3
12.10
.60
5.0%
6.0%
$6,000
4
13.31
.66
5.0%
6.6%
$6,600
5
14.64
.72
5.0%
7.2%
$7,200
6
16.11
.79
5.0%
7.9%
$7,900
7
17.72
.87
5.0%
8.7%
$8,700
8
19.49
.95
5.0%
9.5%
$9,500
9
21.43
1.04
5.0%
10.4%
$10,400
10
23.57
1.14
5.0%
11.4%
$11,400
15
37.93
1.81
5.0%
18.1%
$18,100
20
61.06
2.88
5.0%
28.8%
$28,800*
25
98.12
4.60
5.0%
46.0%
$46,000
30
157.74
7.39
5.0%
73.9%
$73,900


Key points for Dividend Investors

  • *In 20 years the current dividend yield remains at 5.0% of the most recent share price. But for long term shareholders, the way to value the dividend is to view it as yield on the original investment (Yield on Cost %). Though the value of the original investment has risen over the years, the cost has not changed.
  • In 20 years the stock that was purchased for $10.00 is now worth $61.06, meaning that the original investment principal of $100,000 has now grown to over $600,000. In addition you are now receiving a $2.88 annual dividend which means that the yield on your cost ($100,000) is 28.8% or $28,800 in income per year!
  • If the dividend is not cut, you will receive, year in and year out, your annual yield on investment of 28.8% or ($28,800). Even better, if the company continues to increase the dividend payout by 10% each year, the 28.8% will grow to 31.6% ($31,600) and the following year to 34.7% ($34,700).
  • Between years 8 and 9 from the dividend income alone (without any stock appreciation) your annual rate of return would be at the historic average stock market return of 10% and growing!

The power of dividend increases is astronomical but it needs two things; time and patience. Could you be satisfied with annual returns of 10% a year (and growing) from dividend income alone?

Dividend Income VS Other Investment Income

Dividends can and have acted as an inflation protector in a way that CD’s, Bonds and other so called fixed assets cannot. Inflation has grown at an average of 4% annually, which means that in a little over 18 yrs, prices would have doubled. While you are collecting the interest income from your CD’s or Savings Bonds the principal that you have invested is slowly being eaten away at an average of 4% per year!
If you don’t believe it, think about what the prices were in 1985 for a movie ticket ($4) and today ($10). How about an average automobile in 1985 ($7,000) and today ($20,000) or even a haircut for ($6) and today ($20). That was in the 1980’s but what about the 90’s? In 1996 gold was approximately ($275) per ounce and today ($600) or how about a barrel of oil for ($10) in 1996 and today at $60? These costs have more than doubled and so have many others like insurance, housing, medical care, food,beverages etc.

Investors turn to CD’s, Bonds and other fixed assets for many reasons. One of the key reasons is to receive a current income stream. However, they sometimes don’t realize that there are many key factors that should be considered when investing such as:

Key Factor
CD
Bonds
Money Markets
Dividend Stocks
1. Current Income
Yes
Yes
Yes
Yes
2. Reliable Income
Yes
Yes
Yes
Yes
3. Increasing Income
no
no
no
Yes
4. Principal Appreciation
no
no
no
Yes
5. Inflation Protection
no
no
no
Yes
6. Tax Efficiency
no
no
no
Yes


Key points for Dividend Investors

  • CD’s, Bonds and Money market accounts provide only 1 income stream — the interest on your principal
  • Well chosen qualified dividend paying stocks provide 3 simultaneous income streams — the current dividend income, increasing future dividend income and the share price appreciation
  • The maximum tax on interest income from CD’s, Bonds and Money market accounts is up to 35%
  • The maximum tax on Qualified Dividend Income is only 15%

Dividend Investor.com ™ provides our members with the essential proprietary mining tools to screen stocks by dividend yields, payout ratios, growth rates, histories and many more criteria. Join now so you can start to identify your own diversified basket of dividend winners!

Dividends For Inflation Protection

Why do the right dividend stocks provide investors inflation protection and the security of current and rising income?

Take two hypothetical 10 year investments: The first is a qualified dividend paying stock that has a dividend yield of 5%, increases its dividend 10% per year and its share price increases 8% annually. The second is a CD/Bond that pays a yield of 5%. Let’s assume you invest $100,000 into each equally with inflation running at (4%) per year. Below is what happens over the 10 year period:

Year
Principal$
Inflation
Yield On Cost%
Income Paid$
CD/Bond VS Div. Stock
CD/Bond VS Div. Stock
CD/Bond VS Div. Stock
1
$100,000
$100,000
(4%)
5.0%
5.0%
$5,000
$5,000
2
$100,000
$108,000
(4%)
5.0%
5.5%
$5,000
$5,500
3
$100,000
$116,640
(4%)
5.0%
6.0%
$5,000
$6,000
4
$100,000
$125,971
(4%)
5.0%
6.6%
$5,000
$6,600
5
$100,000
$136,048
(4%)
5.0%
7.2%
$5,000
$7,200
6
$100,000
$146,931
(4%)
5.0%
7.9%
$5,000
$7,900
7
$100,000
$158,685
(4%)
5.0%
8.7%
$5,000
$8,700
8
$100,000
$171,379
(4%)
5.0%
9.5%
$5,000
$9,500
9
$100,000
$185,089
(4%)
5.0%
10.4%
$5,000
$10,500
10
$100,000
$199,896
(4%)
5.0%
11.4%
$5,000
$11,400
Total
$100,000
$199,896
Purchase
new CD?
Continue
to grow!
$50,000
$78,300


Key points for Dividend Investors

  • The principal of the dividend stock at the end of only 10 years has nearly doubled to $199,896 while the CD/Bond has remained at $100,000
  • The principal of the CD/Bond inflation adjusted at (4%) per year at the end of 10yrs is now worth only $66,480
  • The dividends paid for the dividend stock have increased by 10% per year, increasing the yield to 11.4% in year 10
  • The cumulative 10 year annual income paid is more than $28,000 higher with the dividend stock

Owning the right diversified basket of dividend paying stocks can provide a tax efficient investment that provides a current income stream, a rising income stream and inflation protection while the principal has the opportunity to grow.

Compounding Dividends

Compounding dividends are the investment that makes money, added to the money that the money has already made. By creating this virtual cycle, you will have created your very own dividend money machine. Dividend reinvestment will bring you more shares, each of which will earn more dividends.

Dividends are normally paid quarterly and by systematically reinvesting, you obtain dollar cost averaging with an increasing principal amount without adding any new cash! For investors who do not need the current income and choose to reinvest the dividends received, they have truly created their very own money machine.

Take a hypothetical example of an investor who owns 10,000 shares of a $10 stock that yields 5% and reinvests the dividends paid:

(For simplicity the stock price remains at $10 and the dividends are not increased)

Year
Stock Price
Dividend Amount
Purchased Shares
Total Shares
$Value
1
$10
$5,000
500
10,500
$105,000
2
$10
$5,250
525
11,025
$110,250
3
$10
$5,510
551
11,576
$115,760
4
$10
$5,788
578
12,154
$121,540
5
$10
$6,077
607
12,761
$127,617
6
$10
$6,380
638
13,399
$133,990
7
$10
$6,699
669
14,068
$140,689
8
$10
$7,034
703
14,771
$147,714
9
$10
$7,385
738
15,509
$155,095
10
$10
$7,754
775
16,284
$162,844
15
$10
$9,895
989
20,780
$207,805*
20
$10
$12,628
1,262
26,518
$265,180
25
$10
$16,115
1,611
33,841
$338,415
30
$10
$20,566
2,056
43,188
$431,886


Key points for Dividend Investors

  • *By harnessing the power of dividend reinvesting, in less than 15 years, the investment would have doubled in value  to over $200,000 and shares owned to over 20,000!
  • This amazing return does not even take into account any dividend increases or even any stock price appreciation. The return is  solely based  on the dividend reinvestment
  • Locating a diversified basket of stocks that pay a dividend, have a history of paying a dividend and increase the dividend regularly is a great step towards creating your own money machines

When someone asked  Albert Einstein  what was the most important thing he learned from mathematics, he replied: “Compound  interest. It’s the most powerful force on earth.”

Signs To Look For When Searching For Dividend Paying Stocks

  • Dividend paying stocks that have  paid dividends consistently  for 5yrs or more which demonstrates that paying dividends is a priority
  • Dividend paying stocks that have  increased their respective dividend payouts  by 25% or more over the last 5 yrs which demonstrates growth
  • Dividend paying stocks that carry a  market cap  of greater than $1B which can reduce volatility
  • Dividend paying stocks that have a  debt to equity ratio  less than 70% which reduces risk
  • Dividend paying stocks that have a  dividend yield  higher than 1.50% which demonstrates a yield higher than normal market averages
  • Dividend paying stocks that have a  dividend payout ratio  less than 70% which demonstrates the capacity to continue to pay dividends

Whether you are an investor in your  20’s, 30’s or 40’s  and have a 50yr time horizon or an investor in your  50’s, 60’s or even 70’s  and have a 20yr plus time horizon –  why wait?  At Dividend Investor.com ™ we often hear,“if I had only known about this earlier”  and incredibly, we hear this from investors in all ages ranging from their  20’s to their 70’s!

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