Dividend enthusiasts understand the value of receiving those quarterly payments, which really add up over time. For investors who’d rather not have to keep their eyes glued to every market headline, pinning their retirement hopes and dreams on the daily prices of their stocks, dividends are a reliable source of returns. Dividends allow you to sleep well at night, knowing that those checks will arrive, regardless of the prevailing economic climate.
Few metrics have the ability to convey the true power of dividend growth as much as the concept of ‘yield on cost,’ which measures the percentage of an investor’s initial investment that they currently receive as dividend income. For example, while the market’s most well-known dividend-paying stocks will pay between 3% and 4% for new investors, regular dividend increases mean that over time an investor will receive much bigger payouts when compared to their original investment.
The most powerful force in the universe
It’s rumored that Albert Einstein once stated that compounding interest was the most powerful force in the universe. Whether or not he actually said the words is less important than the value of the message. Those who understand the wonders of dividend growth will likely see the truth in such a statement.
Consider the fact that if you had a $100,000 portfolio and 15 years until retirement, you could build a yield on cost of 10%, provided that you picked stocks with dividend yields of at least 3% and raised their dividends by 9% compounded annually.
While a 10% yield on cost might not sound like much, it means that same $100,000 portfolio would generate $10,000 in yearly dividend income after those 15 years, which can help pay for a lot of life’s inevitable expenses.
A basket of stocks to get you started
Picking stocks with 3% yields and 10% dividend growth might seem like a daunting task, but really, it simply involves focusing on the best dividend stocks the market has to offer. While these figures are ambitious goals, it’s absolutely possible to craft a portfolio with stocks that hit the target.
Even better, you don’t have to scour the Earth for obscure stocks you’ve never heard of. Plenty of America’s biggest companies have dividend track records that meet, and in some cases exceed, 10% annualized growth. And, even though the markets continue to breach new highs, it’s still entirely reasonable to secure 3% yields.
For example, Dow Jones Industrial Average components Intel Corporation (NASDAQ:INTC), McDonald’s Corporation (NYSE:MCD), and Chevron Corporation (NYSE:CVX) each pay dividends in excess of 3% annually. In fact, Intel Corporation (NASDAQ:INTC)’s yield is actually more than 4%, meaning your yield on cost will be even greater over time.