Awesome dividend growth

Don’t let yourself assume that dividends are boring little payments that don’t add up to much. Dividend investing is quite powerful.

When you buy shares of healthy and growing dividend-paying companies, you’re likely to receive payouts every year, regardless of what the economy is doing. Many blue-chip companies’ dividend yields (their annual dividend amounts divided by their current share prices) easily top the low banking interest rates available to savers today.

Here’s something investors rarely consider: Imagine you bought 10 shares of the Antisocial Media Co. (ticker: SCRAM) for $100 each, and it offers a respectable 3 percent dividend. With a $1,000 investment, that’s an annual payout of $30. That’s not a huge sum, but healthy companies tend to increase their dividends regularly.

A few years down the line, Antisocial Media may be trading at $200 per share. Imagine that its dividend yield is still 3 percent, as its dividend has been gradually raised to $6 per share. (Note that $6 is a 3 percent yield for anyone buying the stock at $200, but since you bought it at $100, to you it’s effectively a 6 percent yield on your initial investment.)

Now imagine that many years later, your initial 10 shares have split twice and become 40 shares, each worth $225 now. Your initial $1,000 investment is now valued at $9,000. The dividend is now $6.75 per share for a yield that’s still 3 percent, so your 40 shares deliver a whopping $270 per year. You’re now earning $270 for the year on a $1,000 investment. That’s an effective return of 27 percent per year (and growing) — without even counting any stock-price appreciation. The yield on your initial investment has gone from 3 percent to 27 percent, because you just hung on to a growing company. Even if the stock price drops, you’re still likely to get that 27 percent payout — unless the company is in trouble.

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