Rate of return is a very important aspect of investing. I strongly advocate a pursuit of investing in stocks similar to an individual buying a stake in a company (because that is exactly what you are doing). For some reason, calculating rate of return is very common when someone is buying a company, but not very common for individual investors buying stocks.
For dividend investors, the rate of return is the dividend yield plus capital appreciation on the shares themselves. Since we are pursuing a strategy of long-term investing independent of short-term fluctuations in share price, we are primarily focusing on dividend yield.
The dividend yield is comprised of both the dividend payout and the share price. The yield is calculated by dividing the payout by the share price. For example, a company paying $5 in annual dividends that has a share price of $50 would have a yield of 10%.
Management is what determines the dividend payout. You want to own companies that have a long record of increasing dividend payouts each year.
You control the share price at which you purchase shares. What most people fail to realize is that you essentially lock in the yield when you purchase shares. If those $50 shares rise to $100, new money would be getting 5% in yield, but you’re still getting that 10% return that you locked in on the capital allocated. What this means is that the yield you lock in at the point of buying shares is extremely important.
This is where most people glaze over because they think I’m talking about market timing and/or trading and most people have been conditioned by the Wall Street machine to think this is impossible and a futile effort. Side note: They want you to think it is futile so that you are always maximally invested at all times so that they earn maximum fees at all time.
While timing trades perfectly is nearly impossible and now what I’m talking about, being aware of the current stock market level and investing public sentiment is a whole different story.
Most investors fail to to do well because they fail to master their emotions and they have no ability to exercise patience when investing. Both are very important for successful investing with high rates of return. Compounding high rates of return are the key to building massive portfolios and massive wealth.
On this site, we advocate two types of accumulation of shares of high quality companies:
- DRIP Investing – Buying shares on a regular basis (monthly) of a company regardless of intermediate price moves through a Dividend Reinvestment Plan. See more on DRIP Plans here.
- Bulk Share Purchases – Buying a block of shares because we think the stock is currently trading at an attractive entry point.
Each stock I recommend on this site will have a corresponding purchase action in one of the two methods described above. Sometimes, we will do both (see Wal-Mart).
As such, in the Dividend Portfolio, you will see whether or not I have an active DRIP plan for each recommendation, and you will also see my target buy price for bulk share purchases.
Remember, nothing is a more powerful wealth building tool than compounding high rates of return on an annual basis over a prolonged period of time.