Double Your Dividends in 6 Years

Wells Fargo cut its dividend back in March. At the time, it was yielding nearly 10% -- a figure that turned out to be too good to be true.

I didn't own Wells Fargo at the time (and don't today), but I can sympathize with shareholders. Recently, lured by a juicy yield, I bought shares of International Paper … not long before the company reduced its dividend by 90%.

Ouch
Though you should view double-digit yielders with a raised eyebrow, high yields aren't dangerous in and of themselves. However, rather than chasing companies that offer the fattest payouts, you'll do better to focus on dividend growth instead.

You can double your dividends, and double the yield you enjoy on the price you paid for your stock, just by being patient. How? Healthy, growing companies not only tend to pay out sizable dividends, but also to increase those dividends over time.

Math trick time
You can use the handy "Rule of 72" to see how long it will take to double your yield. Divide the number 72 by the expected growth rate, and you'll get the number of years it'll take for your yield to double. For example, a stock whose yield grows at 12% annually would double in six years.

Let's try the Rule of 72 on some real-world examples:

Source: MSN Money.

If we assume that (1) Home Depot averages dividend growth of just 12% over the coming years, and (2) you're earning a 3.4% yield on your cost, then in six years, your yield will double to 6.8%. Six years later, it'll top 13%. In 20 years, you'll be reaping a yield that represents more than 30% of your original purchase price.

If you'd invested $10,000, you'd be raking in more than $3,000 yearly. With a little luck, the stock's actual price will also have appreciated over 20 years. That one-two punch is hard to beat.

Foolish final thoughts
Remember that high yielders with slow growth might not be as attractive as average yielders with high growth. While some in the former group may be relatively safe dividend payers, other dividend payouts aren't so sustainable.

That's why you shouldn't just go out chasing high yields. Never assume that two companies offering 4% yields are largely the same, dividend-wise. For long-term investors, dividend growth matters.

So, where do you find stocks with healthy, growing, sustainable yields? You're in luck -- now is a very attractive time in which to buy dividend payers. Companies you may have wanted to own anyway are now offering more attractive prices (with better yields, in some cases) than they were a year or two ago.

Of the names highlighted in the above table, Hasbro and Penn West Energy have earned top five-star ratings in our CAPS community of investors. If you'd like some help identifying dividend dynamos, we'd love to introduce you to many promising dividend payers via our Income Investor service, which you can try for free. On average, its picks are beating the market handily, and they boast an average dividend yield of more than 5%. Click here to learn more about a free trial.

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This article was originally published on June 8, 2009. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of Home Depot. Hasbro is a Motley Fool Stock Advisor recommendation. The Home Depot and Pfizer are Motley Fool Inside Value selections. The Fool owns shares of Hasbro. The Motley Fool is Fools writing for Fools.