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:

Company

Dividend Yield

5-Year Dividend Growth

Hasbro (NYSE: HAS  )

3.0%

46%

Valero (NYSE: VLO  )

3.2%

40%

Penn West Energy (NYSE: PWE  )

12.4%

58%

Exelon (NYSE: EXC  )

4.1%

16%

Home Depot (NYSE: HD  )

3.4%

28%

Banco Santander (NYSE: STD  )

5.2%

17%

Northrup Grumman

3.7%

14%

Caterpillar (NYSE: CAT  )

3.5%

18%

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.

Already subscribe to Income Investor? Log in at the top of this page.

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.


Read/Post Comments (5) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 11, 2009, at 3:34 PM, ArchyMcN wrote:

    Highest dividend yielding stocks top 100:

    http://www.TopYields.nl/Top_100_dividend_yields_1.php

  • Report this Comment On August 11, 2009, at 3:43 PM, mretome1960 wrote:

    I see you included EXC in your table so here's another real world example for you. I have owned EXC for a number of years and the dividend now represents more than a 13% return on my original investment. On top of that, I have more than $30 per share in capital gains.

  • Report this Comment On August 12, 2009, at 12:08 AM, paultaut wrote:

    PWE has cut its dividend drastically over the past 5 years.

    PSEC has Increased its dividend every quarter over the last 19, not quite 5 years.

    Guess where my money is going?

  • Report this Comment On August 12, 2009, at 4:23 AM, danmiddleton999 wrote:

    Good article with excellent advice.

    Another benefit to dividend payers is the inexpensive and painless reinvestment of those dividends which compounds the growth of the dividend and further improves your yield over time.

    I have had HD for years in a reinvest program and now have 17% more shares paying dividends. Same with BMY number of shares up 23%. Even my MSFT shares are up a small percentage due to reinvestment of the dividend.

    When I need the income during retirement I will be benefiting from a tremendous return on invested money and due to price averaging I will be more likely to be in a capital gain position.

  • Report this Comment On August 13, 2009, at 1:52 PM, koppre wrote:

    Dividends:

    I am questioning companies that do not pay out dividends - 'share the wealth". How then does a common shareholder share in the profits of a "public' company.

    Can you provide some insight as to how common share holders benefit from companies that do not pay dividends. I understand reinvesting,

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