I pick dividend stocks for a living, but even I was surprised to learn that according to Wharton professor Jeremy Siegel, from 1871 to 2003, only 3% of the market's return came from capital gains of the original investment. That means 97% came from reinvesting dividends! Dividend reinvestment is a beast you want to harness.
To help you in the here-and-now, I've got six starting-point stocks coming up, but stay with me on the power of reinvesting for a moment.
The (re-invested) dividend difference
Since the idea of beginning your investing career back in 1871 is pretty ridiculous, consider that a mere $1,000 plunked into what was Philip Morris and is now Altria (NYSE: MO ) in 1980 would be worth an astonishing $46,000 25 years later -- without considering dividends.
And considering dividends? Had you just taken the dividends without reinvesting them, you'd have $64,000. But had you reinvested those dividends, your results would be mind-blowing: $146,000!
$1,000 to $146,000. In a stodgy, blue-chip, bellwether stock. If you wanted to do that the hard way -- through a non-dividend paying "growth" stock, you'd have to do better than 22% yearly! Any takers?
If you were to tire of amassing whopping dividend-reinvested returns (who would?), you can always switch to an income-only strategy. With Altria specifically, right now you could be taking in a nice $6,300 each year from your original $1,000 investment.
Six starting-point stocks
Where are today's blockbuster dividend payers? That's a million-dollar question, but it's one that could mean the difference between a plush or a parsimonious retirement. A starting point could be some dividend payers from the S&P 500 -- at least one study showed high dividend payers beat low payers by 3 percentage points annually. Doesn't sound huge, but it's darn big from a statistical standpoint. To put that kind of power in your portfolio, here are some ideas -- not recommendations per se, just ideas -- for consideration:
1. First Horizon (NYSE: FHN ) has had its share of yield curve and housing market woes. But this lesser-known Tennessee bank sports steady dividend growth and a sound operational structure that should buoy the company when the economic tide comes back in. A 4.4% payout keeps investors company while they wait.
2. Ameren (NYSE: AEE ) is a gas and electricity distributor serving Missouri and Illinois. Though the firm has a solid reputation, it's taking flak over recent power outages and potential volatility surrounding the portion of its earnings coming from unregulated markets. Still, its 4.7% yield is nothing to sneeze at.
3.DTE Energy (NYSE: DTE ) also delivers a 5.1% dividend the old-fashioned way: Through regulated returns. Though the past three months have been very kind to the stock, the company operates in a state known for its regulatory unfriendliness: Michigan.
4.Reynolds American (NYSE: RAI ) has been on a tear the past few years, and still manages a 4.6% dividend. But a cigarette maker is pretty far from a feel-good (or smell-good) investment. You decide.
5.Pinnacle West Capital (NYSE: PNW ) , owner of Arizona's major utility, along with some other odds and ends, has risen 28% since mid-2006. Not bad for a company scoring 75% of its revenues from regulated electricity. The 4.1% yield is nice, although some folks wonder if the utility bull market is becoming a bit long in the tooth.
6.Verizon (NYSE: VZ ) is catching many a yield-chaser's eye these days with its 4.4% payout. The company's solid financials and renewed focus on its core business could make a recipe for long-term returns. Plus, Verizon just appointed a new COO.
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