THE FOOL SCHOOLThe Power of Dividend Growth
You may think of venerable blue chip companies such as Ford, Bell Atlantic, J.P. Morgan and Chevron as stodgy and old-fangled, but think again. They pay generous dividends.
If you bought Ford when its dividend yield (annual dividend divided by share price) was 3.6 percent, you’re very likely to get that 3.6 percent payout every year, regardless of what happens to the stock price. (Struggling companies may decrease or eliminate their dividends, but they try like heck not to, because it looks really bad.) Couple stock appreciation with dividends, and you’ve got an appealing combination.
Here’s something investors rarely consider. Let’s say you bought 10 shares of Stained Glass Windshield Co. (ticker: STAIN) for $100 each and they pay a respectable 2.5 percent dividend. With a $1,000 investment, that amounts to an annual payout of $25. Not bad.
Better still, dividends aren’t static and permanent. Companies raise them regularly. A few years down the line, perhaps STAIN is trading at $220 per share. If the yield is 3 percent, it’s paying out $6.60 per share. Note: $6.60 is a 3 percent yield for anyone buying the stock at $220, but since you bought it at $100, to you it’s a 6.6 percent yield.
Decades pass. Your initial 10 shares have split into 80 shares, each currently priced at $120. Your initial $1,000 investment is now valued at $9,600. The yield is still 3 percent, offering $3.60 per share. With 80 shares, you receive a whopping $288 per year. Think about this. You’re earning $288 on a $1,000 investment. That’s 29 percent per year (and growing) — without even counting any stock price appreciation. The yield for you has gone from 2.5 percent to 29 percent all because you just hung on to those shares of a growing company. That’s security, Fool! Even if the stock price drops, you’re still likely to get that 29 percent payout.
With many great dividend-paying companies, by holding on, your dividend yield keeps rising. Consider this: One share of Coca-Cola bought in its first year has become more than 97,860 shares through stock splits and dividend reinvestments; that investment is now earning an annual dividend of more than $58,000.