Posted on | May 15, 2011 | Comments Off
I talk a good bit about companies that increase dividends on a regular basis and what that means with your return on your initial cash outlay. Here is a simple example to help demonstrate this principle.
Let’s say that MyDividendStocks.com is paying a dividend of $1 to shareholder and it is a $50 stock. The current yield is 2%. Not very good, but the good thing is that the company will be increasing dividends every year from here on out.
The following table shows what the dividend would look like with an annual 15% increase in the dividend, and the corresponding return on your initial cost you would be seeing:
|Year||Dividend||Return on Cost|
As you can see, by year six, the dividend payout has already doubled. By, year ten, it has more than tripled. By year 15, the dividend has gone up seven times! You can see the acceleration as the years go on – the power of compounding.
This clearly demonstrates the incredible power of DRIPs. The growth is slow in the beginning, but as you stick with it and let time work, it becomes a massive growth machine that will result in some huge positions for you if you work hard to put money into the DRIP and you pick companies that will grow their dividends over time.
This table doesn’t even factor in the share price appreciation that will surely be a part of a company that is raising its dividend each year. While the yield on initial cash in year 15 is 14.16%, the stock price would surely have risen with the dividend over the years meaning it’s likely the yield on “new cash” in year 15 might still be closer to 2%. With a dividend of $7.08 on a stock yielding 2%, this would mean a share price of $354. Wow. What would your balance look like in that DRIP account? And, that’s only 15 years! What would happen if you allowed growth to take place over 30 years?