“The most powerful force in the Universe is compound interest!” – Albert Einstein
Einstein was amazed at the effect compounding interest could have on an individuals wealth. Had Einstein come across dividend growth stocks, the super compounders of investing, he would have truly been blown away.
Dividend growth stocks offer investors a compounding effect beyond any other type of investment. There are not just one, not just two but in fact there are THREE ways a dividend growth stock can work at compounding wise investors wealth over time.
The Three Ways Dividend Growth Stocks Compound
- Stocks of any kind have a compounding effect through stock market returns. An X% return this year builds upon the returns of last year, the year before that and many many years before that. Each year the market increases it is compounding on prior years gains.
- The growth of the dividend rate has a compounding effect on our income. An X% dividend growth rate this year builds upon the growth from all prior years.
- By reinvesting dividends, investors can take advantage of the third type of compounding. Each additional share an investor purchases by reinvesting their dividend income will then begin earning it’s own dividend income. These new shares allow us to earn more dividend income that investors can then put to work to earn even more dividend income. Reinvesting dividends also allows wise investors the opportunity to take even greater advantage of the first type of compounding.
The Power of Compounding Dividend Growth Stocks
Take a look at the chart below to get an idea of how much power dividend growth stocks can have when it comes to growing your overall wealth.
|Start Age||End Age||Total Years||Annual Contribution||Final Value|
|20||65||45||$ 5,000.00||$ 2,726,021.66|
|25||65||40||$ 5,000.00||$ 1,777,784.28|
|30||65||35||$ 5,000.00||$ 1,152,224.48|
|35||65||30||$ 5,000.00||$ 739,537.68|
|40||65||25||$ 5,000.00||$ 467,284.89|
|45||65||20||$ 5,000.00||$ 287,677.54|
|50||65||15||$ 5,000.00||$ 169,189.14|
|55||65||10||$ 5,000.00||$ 91,021.36|
|60||65||5||$ 5,000.00||$ 39,453.50|
The above chart assumes a person makes $5,000 investments each year. It also assumes that the portfolio earns a 3.5% dividend yield that is reinvested and earns 5% market returns.
This chart shows the effect compounding can have for a dividend growth investor. If one starts at a fairly young age, they can save a small amount of just $5,000 a year and grow their portfolio well above $1,000,000.
At retirement age, the investor can begin collecting the dividend income in cash rather than reinvesting. This will allow the investor to live completely off of dividend income to cover their expenses and spending.
This chart is one example of what can happen over time for a dividend growth investor. Depending on growth factors, the ending result could be much much higher.
The end result depends on 3 factors:
- Number of years one has to allow compounding to work.
- Amount invested each year.
- Growth rates of dividends and market value of stocks over time.
The larger any of those factors are, the greater amount of wealth one will have when they are ready for retirement.
There are many different ways dividend growth stocks compound to help investors create wealth over time. Investors can create a very sizable nest egg by starting young, investing a portion of annual earnings, reinvesting dividends and earning a decent return from the overall market.
Don’t be delayed. Take advantage of what Einstein believed to be the 8th wonder of the world! Get the ball rolling and after time, compounding will start working miracles in your portfolio as well!
If you are interested in building a compounding wealth machine using dividend growth stocks then you should sign up for the free Dividend Growth Stock Investing Newsletter!
When it comes to dividend investing, one of the big questions investors must answer for themselves is what to do with the dividend income they receive. There are really 4 things an investor can do with his dividend income.
- Use the dividend income to cover expenses and spend on whatever the investor pleases.
- Use the dividend income to purchase other types of investments such as bonds or real estate, etc.
- Reinvest the dividends back into the company which paid them.
- Collect the dividend income and choose a different company for dividend reinvestment.
Most likely, if you are financially independent and living off the dividends, then you will follow the first option and use your dividend income to cover your financial obligations.
If you are still in the accumulation phase, building your portfolio towards your ultimate goal of financial independence, then I would recommend reinvesting the dividend income. This allows the dividends to have a compounding effect on your wealth. You will purchase new shares with your dividend income and those new shares will begin paying you dividends. Of which you can use to collect even more shares.
There are two ways to reinvest your dividend income. You can either use the dividend income to buy shares of the same company that paid the dividend, or you can decide to use the dividends to buy shares of a different company.
Both methods work well and each has their own pros and cons worth considering.
Reinvesting in the Same Company
Many investors like to use their dividend income to purchase shares in the same company that paid out the income.
You can do this by manually going out and making a new buy transaction with the dividend income received. However, this is fairly tedious and there is a better way.
Investors wanting to reinvest back into the same company should consider what is called a DRIP (dividend reinvestment program). There are some brokerages that allow free or fee based DRIP’s. Also, there are many companies that offer their own DRIP programs. These involve signing up through the company. Investors should be aware that different programs have differing fee structures (some reasonable while others not worth the high cost).
Pros of Reinvesting Back Into the Same Company
- Simple – Investors make it automatic and don’t have to decide which company is best to purchase.
- Great companies – Investors already know they want to own that particular company and therefore are just adding to thier already established position.
- Sometimes low fees – There are some brokerages or companies that offer very reasonable reinvestment fees. Oftentimes these fees are lower than the normal brokerage fees for a regular buy.
Cons of Reinvesting Back Into the Same Company
- Valuation – Investors are buying shares in a company regardless of valuation. Sometimes stocks are overvalued and there are probably better opportunities for your money to be invested elsewhere.
- Sometimes high fees – While some brokerages and companies offer low fee reinvestments, others sometimes are fairly high. Investors should make sure they understand all fees involved before reinvesting. It is important to keep fees down below at least 2% of transactions so as not losing all your money to the brokerage houses.
- Not available through all brokers – Not all brokers give investors the ability to automatically DRIP their dividends. I personally use Scottrade and they currently don’t offer this option.
Reinvesting in a Different Company
Another option for reinvesting dividends is by collecting all your dividend income payments and then using the money to purchase shares in a company of your choosing. This could be the same company that paid out the dividend income or it could be a completely different company.
This is the strategy I personally use. I have a fairly small portfolio right now so I collect the dividend income and add new investment capital to make new purchases. I do this for many reasons listed in the pros below.
Pros of Reinvesting in a Different Company
- Valuation – The main reason I prefer this method is it allows me total control over which company stock I am now purchasing. I can look over valuations and decide on the best valued stock opportunity I want to purchase at any given time. I am not automatically purchasing new shares in a company that I believe to be currently overvalued.
- Low fees – I make sure to combine my dividend income with new capital to keep my brokerage transaction fees low. New purchases fees are my normal commissions I pay for any buy. I make sure to keep these fees always below at least 2%.
- Method can be used through any broker. While my broker doesn’t allow a DRIP, I am able to reinvest dividends with this method.
Cons of Reinvesting in a Different Company
- Not Simple – With each purchase I have to make a decision about what company I want to currently buy. I have to research different companies and valuations to decide upon the best opportunity.
- Cash not put immediately to work – I have to wait until either my dividend income is high enough for a purchase or until I have enough new capital to contribute before I can put that money to work with a new purchase. This means sometimes I will have a few hundred or so in cash. That cash will not be earning me more dividend income yet. It will not be put to use until I have enough cash to make a big enough purchase to keep my transaction costs low.
If you are in the accumulation phase of investing then it is a good idea to reinvest your dividends. Either method works fine and you have to decide for yourself which you prefer.
I like to have control over what I am investing in and I like to try and pick the best valued opportunities available. Investing in dividend growth stocks is a fun hobby for me and I enjoy researching different companies. For all investors this isn’t exactly the case. Some investors may want to make things easy by automatically reinvesting in the same company which paid out the income.
The choice is yours. Either way you choose, make sure you reinvest your dividend income so you are not losing out on the power of compounding dividends!
What do you do with your dividend income? Do you reinvest? If so what strategy do you use to put that dividend income back to work?
With the market reaching all time highs lately, it is getting harder and harder to find under and fair valued stocks to purchase for your dividend growth portfolio.
When investing, the valuation we pay for a company’s stock is very important. If you make the mistake of over paying for a very stock, you will most likely end up with disappointing market returns over the next few years.
Right now, there are some great companies that would fit perfectly in a dividend growth stock portfolio. Unfortunately, due the high rise of the stock market, these stocks aren’t trading at great valuations and investors buying at these levels may end up disappointed with overall returns.
Following are 20 great dividend growth stocks that you should NOT be buying at the present time. Instead, have patience and wait for a market correction before picking up shares in these companies.
- Coca-Cola (KO) – This dividend growth king is selling at a current P/E right around 22. Coca-Cola is a leader in the beverage industry and can be found in many dividend growth portfolios. I’d love to own some more shares, but the price is too high right now.
- General Mills (GIS) – This consumer foods company is a great fit for dividend growth investors. But paying the current 18.5 P/E multiple is not the best investment. Look for the price to fall before picking up shares of this cereal giant.
- McDonald’s (MCD) – This fast food restaurant recently announced dropping the line of Angus burgers do to low demand. The thought is that prices were too high for the quality meat. The stock price is also too high and prudent investors would be wise to wait for a better entry point than the current 18.6 P/E.
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I had some capital ready for a purchase this month and decided to pick up some shares of tobacco company Lorillard (LO). If you’ll remember I was considering Lorillard for purchase last month but ultimately went with a different decision. However, I remained interested in Lorillard due to the higher dividend yield. I did a Lorillard dividend stock analysis last month and concluded the company to be a decent buy at the time. The price hasn’t moved much since so I felt the company still offered a decent valuation with a higher dividend yield compared to most other companies in my portfolio.
I picked up 22 shares of the tobacco company at a per share price of $42.83. The current dividend yield at this buy price is at 5.14%. This purchase will add about $48 in annual dividend income to my portfolio and I expect that to annually increase.
This brings the number of companies in my portfolio up to 16 total companies. I have a wide range of diversification ranging from insurance, oil, tobacco, agricultural machinery, toys, beverages, retail stores, fast food restaurants, computer software, railroads and pharmacy companies. I recently wrote an article on Seeking Alpha about diversification and the reasons I am ultimately building towards a portfolio of about 35 companies. I plan to explore this idea more in detail later this month on this site.
Looking towards next month there are a few companies I have my eyes on for future purchases. I am interested in picking up some shares of Wells Fargo (WFC) to add more industry diversification to my portfolio. I believe Wells Fargo to be the best run of the big banks. I’m also interested in looking at oil companies Chevron (CVX) and Exxon Mobil (XOM) because I believe over the long term they will prove to be wonderful investments. Last, I want to look more at tobacco companies Altria (MO) and Phillip Morris (PM). I’m interested in tobacco companies because they typically offer a higher yield than some of the other companies I hold in my portfolio (although not the case with PM). Higher yielding securities will pay me more dividend income that I can use to purchase more shares giving me a greater compounding effect. I hope to explore this idea in more detail later in the month as well.
Ultimately I want to make sure my portfolio has a good range of diversification to increase the safety of my overall portfolio income. I will accomplish this by owning many different companies as well as not allocating any large portion of the portfolio to one industry. I’d like a good mix of companies and industries. I like the idea of higher yielding securities and thus more income, but not at the expense of taking on more risky companies and less diversification.
What do you think about my Lorillard purchase? What are you buying currently? Share your thoughts in the comments below!
Kimberly-Clark (KMB) is a consumer products company that manufactures and sells personal care products. Brands investors will recognize include Huggies, Pull-Ups, Kotex, Depends, Kleenex, Cottonelle and Viva paper towels. The company also has a professional segment selling workplace health/safety products such as soaps, sanitizers, tissues and towels. They also operate a health care segment providing medical supplies, infection prevention and health education.
Kimberly-Clark has a long reputation of dividend growth. For 41 years in a row, Kimberly-Clark has been rewarding loyal shareholders with increasing dividend income payments.
Dividend Growth and Current Yield
Kimberly-Clark currently pays a dividend of $0.81 per quarter for a $3.24 annual dividend. At the close of market on Friday, May 3rd, KMB’s price per share was $105.38. This gives the stock a current dividend yield of 3.08% (3.24/105.38).
In 2003, Kimberly-Clark payed an annualized dividend amount of $1.36 per share. The dividend trend has been up each year as it now pays $3.24 annually per share. This gives KMB a 10 year annual compound dividend growth rate of 9.07%. More recently the annual dividend growth rate was 5.72% for 2011 to 2012 and 9.46% from 2012 to 2013.
The dividend growth rate has continued above the rate of inflation. I personally look for dividend growth at or above the 7% per year level. Kimberly-Clark has done a good job growing their dividend through the years at a decent growth rate.
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There were quite a few dividend increases in April that I was interested in. Unfortunately I don’t own any of these companies but some are certainly on my wish list.
Cisco Systems (CSCO) - Cisco is a technology company that designs and manufactures networking and other products related to communications and internet technology. They started paying a dividend back in 2011 and have increased the rate 4 times since. This month, Cisco raised their quarterly dividend by 21.43% from $0.14 to $0.17 per share.
Procter & Gamble (PG) - Procter & Gamble is a consumer products company selling brands such as Tide, Luvs, Head & Shoulders, Bounty and many many more. PG has a very long history of dividend growth dating back 56 years in a row. This most recent dividend increase for Procter & Gamble grew the quarterly dividend from $0.562 to $0.6015 per share. This is an increase of 7.03%.
CSX Corp. (CSX) - CSX is a transporation company providing rail based transportation services. CSX has paid increasing annual dividends for 8 years. This past month, CSX raised their dividend 7.15% from $0.14 to $0.15 per share each quarter.
Sonoco Products (SON) – Sonoco Products is a manufacturer of industrial and consumer packaging products. Sonoco has raised their dividend for 30 years in a row. Recently, Sonoco increased their quarterly dividend by 3.34% from $0.30 to $0.31 per share.
Ameriprise Financial (AMP) - Amerprise is a financial services company offering financial planning advice and services. Ameriprise has an 8 year history of paying increasing dividends. This year they grew their quarterly dividend by 15.56% from $0.45 to $0.52 per share.
Apple (AAPL) - Apple is a personal technology company selling products such as the IPad and IPhone. Just last year Apple began paying a dividend for the first time. They announced their first ever dividend increase growing the quarterly dividend by 15.1%. The quarterly rate increased from $2.65 to $3.05 per share. Is this the start of a long dividend growth streak?
Wells Fargo (WFC) – Wells Fargo is a bank holding company. Forced to cut their dividend during the financial crisis, WFC has recently begun trying to restore their dividend growth reputation. They have grown it each year since 2011. Most recently, WFC increased their dividend from $0.25 to $0.30 per share each quarter. This is an increase of 20%.
Chevron (CVX) - Chevron is a global oil company. They have a long history of dividend growth dating back 25 years. This month Chevron increased their quarterly dividend by 11.12%. The quarterly dividend rate has grown from $0.90 to $1.00 per share.
Exxon Mobil (XOM) - Exxon Mobil is another global oil company with a long history of dividend growth dating back 30 years. An investment in Exxon Mobil stock 10 or 20 years ago would have turned out very good. Exxon Mobil increased their dividend by 10.53% from $0.57 to $0.63 per quarter.
Johnson & Johnson (JNJ) - Johnson & Johnson is a dividend king who has raised their dividend 50 years in a row. They are involved in the manufacture and sale of a broad range of medical products including Tylenol. Recently JNJ grew their dividend by $0.05 or 8.2%. Johnson & Johnson will now be paying $0.66 per share each quarter.
There were quite a few dividend increases this past month. I tried to highlight the ones I believed might interest dividend growth investors the most. Hopefully investors will find some companies here they may want look more into.
Were there any dividend increases you were particular excited about this past month? Please share in the comments below!
If you haven’t already done so, be sure to sign up for my Free Dividend Growth Newsletter. The next issue will be coming out shortly!
Exxon Mobil Corp. (XOM) is a world leading energy company. Their main business is in the exploration and production of crude oil, natural gas and petroleum products.
Owners of Exxon Mobil stock have enjoyed a long history of annual dividend increases dating back 30 years. Investors interested in owning oil companies oftentimes first give consideration to Exxon Mobil, the largest publicly traded oil company. Let’s take a look at how an investment in this oil company would have fared over the past 10 and 20 years.
A 10 Year Investment in Exxon Mobil
Let’s take a look and see how you would have fared if you invested $5,000 in Exxon Mobil stock exactly 10 years ago. On April 24, 2003 you would have been able to purchase roughly 142 shares of Exxon Mobil for $4,988.46 at a closing price of $35.13. The most recent closing price of XOM was April 24, 2013 when XOM closed at $89.43. Today your 142 shares would be worth roughly $12,699.06 for a return of 154.6% or a compound annual growth rate of 9.79%.
Exxon Mobil performed pretty well over the past decade for investors offering an annual return slightly below 10%.
While market returns have been good over the past 10 years, lets not forget about the dividends you would have received during those 10 years as well. Over the course of the past 10 years you would have received a total of $2,151.30 in dividend income. This means that your total return over the past decade of owning Exxon Mobil stock has been 197.7% or 11.53% compounded annually. Through a decade when many claim the stock market has been dead money, Exxon Mobil has almost doubled our money. This has been a great investment through the past decade for owners.
So over the past decade while owning Exxon Mobil shares you have enjoyed a 11.53% compounded annual return. You have been paid in cash dividends $2,151.30. You could have used that dividend income to pay some bills, travel, attend sporting events, donate to charity or anything else you’d like. Or you could have reinvested those dividend payments and your total return would have been even better. XOM was a great investment for dividend growth investors over the past decade.
A 20 Year Investment in Exxon Mobil
A 10 year investment in Exxon Mobil was pretty good for shareholders. How about a 20 years investment? Lets take a look at how you would have fared had you invested roughly $5,000 in Exxon Mobil stock 20 years ago. On April 24, 1993, XOM stock closed with a price of $64.25. You would have been able to buy 77 shares for a total price of $4,947.25. Since that date there were two 2 for 1 stock splits. Today you would have a total of 308 shares worth a total value of $27,544.44. This would give you a return of 456.8% or 8.96% compounded annually.
Once again don’t forget about all the dividend income you would have received over the past 20 years by just owning your Exxon Mobil shares. Over the past 20 years you would have received a total of $7,193.34 in dividend income from Exxon Mobil. This means that your total return over the past 2 decades of owning XOM stock has been 602.2% or 10.24% compounded annually.
So a 20 year investment in Exxon Mobil earned you a total return of 10.24% compounded annually. You would have received $7,193 in dividend income to either offset your expenses or reinvest in the company. Had you reinvested in more Exxon Mobil stock your returns would have been even better.
Exxon Mobil would have been a pretty solid investment over the past decade and 2 decades for those who purchased shares in the company. It is interesting that a fairly boring company operating in the oil industry can be such a great investment for dividend growth investors. They have been growing their dividend for 30 years in a row. This exercise has shown just one more example of a how investing in dividend growth stocks has turned out pretty good for investors following this strategy.
I want to point out that I am not taking into account the company’s valuation 10 or 20 years ago. I am merely looking at how you would have fared if you had purchased the stock exactly 10 or 20 years ago. If the company was overvalued at the time of your purchase, your returns will generally be lower. If the company was undervalued at the the time of your purchase, returns generally will do well. Stock valuation at the time of purchase is one of the most important things to take into consideration. Even a great investment will not turn out great if you pay too much for it.
What do you think? Do you own Exxon Mobil stock? Would you have been happy with these returns over the past couple decades? Where do you see this company going in the future?
If you enjoy reading about dividend growth investing then check out my Free Dividend Growth Investing Guide and newsletter.
A new report out from the Pew Research Center concludes that the richest 7% of Americans got richer during the first two years of economic recovery while average net worth declined for the other 93% of U.S. households. Here is an article from the Associated Press in case you are interested. The reasoning given for this widening wealth gap is that wealthier households usually own stocks and other financial assets that typically increase in value.
This is why I advocate buying long term cash flowing assets such as dividend growth stocks. Look how you would have done by buying stock in such companies as Aflac, Microsoft, Union Pacific, Wal-Mart or Coca-Cola. In every situation you would be wealthier 10 and 20 years later! This is how investing works! You don’t have to be among the richest of Americans to do this.
I can guarantee my household is not in the top 7% of households by wealth. Still, during the recession my net worth increased quite a bit. The reason is I follow a sound financial plan. I purchase assets that will increase in value over time. The assets pay me a passive income which I then use to purchase more long term assets. This is how you build wealth. It’s not difficult! Anyone can do it. Buying stocks and holding for the long term is not exclusive to the ultra wealthy. There is no law that says if you aren’t among the wealthy of people you aren’t allowed to buy stocks. Anyone can do it!
Articles reporting information about the rich getting richer and the poor getting poorer are always followed with many comments. People like to blame the government. People blame the greedy rich. People blame their employers. In fact, people blame anyone and everyone without looking at their own financial habits! You need to quit blaming others and take control of your finances.
Building wealth is not rocket science. It is not something only the rich can do. If you want to build wealth over time then there are a few things you can do and I promise you will gradually increase your net worth.
- Spend less than you earn.
- Don’t have any high interest debt.
- Save up an emergency fund.
- Invest by purchasing assets that will appreciate over time and preferably pay out a passive income. These assets would include stocks and rental properties.
It’s that simple! Do those things and you will build wealth. Maybe you won’t join the wealthiest 7% of Americans. However, I promise you one thing. If you follow those simple guidelines, you will not be like the millions of Americans who are losing wealth. You will join the ranks of those who are gradually building a higher and higher net worth despite the fact that we are not among the richest!
What do you think? Can anyone increase their net worth? Or are all of us not among the wealthiest doomed? If you want to start building wealth by purchasing dividend growth stocks then you should sign up for the dividend growth stock investing newsletter!
This is a guest post from Zach over at www.dividendladder.com. Zach has created a couple neat tools dividend growth investors might be interested in checking out. There is one tool showing dividend history of companies you choose to look up and another tool that can help investors calculate future results based on some current assumptions.
Dividend investing has been a passion of mine since I started becoming interested in achieving financial freedom in 2005. I liked the idea of buying shares in a successful company that was returning profits to its shareholders. After a lot of research and reading it was clear that dividend investing was for me.
If a dividend investor had to focus on only one factor when evaluating a dividend stock (other than yield) it should be dividend growth. That is the basis for the HPR rating I developed to help me rank dividend stocks. You can see all of the dividend stock ranking lists here. It’s not a perfect science but it does help filter out many of the winners from the losers. And as I always like to say these dividend lists are not buy recommendations. They are just a starting point for dividend investment research.
To aid in that research I’ve created a couple of dividend tools. The first and most important tool shows dividend history over a 20 year period. It graphs out the increases and decreases over this time period and also displays it in a chart. At a minimum I want to see a company increasing its dividend by 7% a year or more over a 3 and 5 year average. This dividend growth combined with a dividend yield of 2% or more (ideally 3%) helps me achieve a minimum targeted return of 9% per annum. If the company has a longer history of dividend growth then its always fun to look back and see what the emphasis has been on growth and this tool helps do just that.
The other tool I created is one I rely on frequently for planning and sometimes just for fun. It’s a very beefy dividend calculator. It has two modes, portfolio or individual stock. The portfolio mode is obviously a more general approach to help with an overall scenario. It lets you take into account an average yield and return of all of your investments. The stock mode gets pretty advanced because it accounts for the number of shares you own now and how many you’d own if you used a DRIP program. Both modes actually give you the option to reinvest the shares and both provide a very detailed breakdown of total return and what the investment account would look like at the end of any given period.
Other tools are always in the works and if any readers here at Dividend Growth Stock Investing have ideas I’d love to hear about them. I’m always interested in creating useful tools for the dividend community.