Focus on dividend growth

It's smart to seek strong dividend-paying stocks for your portfolio. But don't just focus on dividend yields. Yield is important, but so is the dividend's growth rate.

A dividend's yield expresses how much of the stock's current price you'll receive annually in dividend form. To calculate it, you divide the annual dividend amount by the current stock price. (Thus, when a stock's price falls, the yield rises, and vice versa.)

As an example, if Buzzy's Broccoli Beer (ticker: BRRRP) pays $0.25 per quarter, or $1 per year, and is trading at $33 per share, its yield will be $1 divided by $33 — which is about 0.03, or 3%.

It's great to have dividend payers in your portfolio because they tend to keep paying you regularly, no matter what the overall economy is doing or whether the stock is rising or falling. (If a dividend-paying company is really struggling, though, it's possible that it will reduce, suspend or eliminate its payout.) Another great thing about dividends from healthy and growing companies is that they tend to be increased over time.

Check this out: Imagine that you bought 100 shares of Buzzy's for $3,300. You'd receive $100 in dividends in the first year (100 shares times $1 each in dividends). Let's say that Buzzy's increases its dividend by about 7% annually. In 10 years, its dividend will be nearly $2 per share, delivering $200 in annual income. Fifteen years after that, the dividend will pay around $543. On your $3,300 purchase, you're now receiving $543 for the year. That's an effective dividend yield of 16% on your original investment!

Better still, assuming that Buzzy's is still healthy and growing, the shares themselves will have increased in value over those years, too. If they're at $180 per share, that $5.43-per-share dividend will still sport a yield of 3%. But those who bought long ago will be getting a yield that's effectively much higher.

Learn more about dividend stocks at Fool.com — click on “Stock Market” near the top of the page.