The Income Investing Chart You Have to See

Picture this:

Imagine if your portfolio doubled as an ATM machine, cranking out cash while you were sleeping, watching television, or reading the paper.

Every month a steady stream of payments flowed straight into your brokerage account. In some cases earning 10%, 25%, even 50% in returns on your original investment.  

As fantastic as it sounds, this is exactly what it's like to own some dividend-paying stocks. Of course, you don't build a double-digit income stream overnight. But with time, even a tiny yield can become a monster payout. It's the irrefutable math of investing.

ConocoPhillips  (NYSE: COP  ) is a great example of what the power of compound growth can do for a stock's yield. Over the past ten years the company has increased its dividend at a 16% compounded annual clip. If you had bought and held the stock over that time, the annual yield on your investment would be almost 15% today. 

Take a look at the chart below to see what I'm talking about. This simple table shows the incredible power of small dividend hikes compounded over time. In this hypothetical investment, I assumed you purchased ConocoPhillips shares at around $18.44 near the beginning of 2003. 

The Power of Compounding in Action

Year Dividend per Share Yield on Cost
2013 $2.70 14.64%
2012 $2.48 13.47%
2011 $2.01 10.91% 
2010 $1.64 8.89% 
2009 $1.46 7.90% 
2008 $1.43 7.77% 
2007 $1.25 6.78% 
2006 $1.10 5.95% 
2005 $0.90 4.88% 
2004 $0.68 3.70% 
2003 $0.62 3.37% 

Source: Yahoo! Finance

Let's play out this hypothetical investment out another 10 years. Assuming ConocoPhillips can continue to grow its dividend at a 10% annual clip, the yield on our original investment will grow to 38% by 2024. That's the magic of compound growth in action. 

ConocoPhillips is a good example of this process, but there are plenty of other companies in the energy sector that have generated similar returns. 

Take ExxonMobil  (NYSE: XOM  ) for example. Many income investors skip over this stock because of its meager 2.6% yield. But over the past decade, the company has grown its dividend at a 10% compounded annual rate. Had you bought and held the stock over that time, your yield on cost would be 7%. 

Chevron (NYSE: CVX  ) has done even better. Over the past decade the company has increased its dividend at an 11% annual clip. If you had held the stock over that time, the yield on your original investment would be 11.5% today. 

The great thing about the oil patch is that these companies are sitting on million of barrels of oil. No matter how much money the Fed prints, the real value of that oil isn't changing as a result. 

Of course, a decade ago none of these stocks had yields that would blow your socks off. But through compounding small gains over time, almost all of these companies now yield in the double digits. 

This common sense type of investing doesn't require extensive education. You certainly don't need an MBA. Just some basic arithmetic will do.

You don't necessarily need smarts either -- just enough observation skills to identify wonderful businesses.

What does it require? The only skill you really need is patience. Anyone can achieve these types of results so long as they are willing to compound their profits over decades and don't fuss over daily fluctuations. Unfortunately, patience is a rare commodity on Wall Street.

Foolish bottom line
The returns generated by ConocoPhillips are evidence that even a small yield can become big given enough time. That's not a lesson most investors want to hear. But it's the irrefutable math of investing.

So which dividends are worth waiting for?
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (4) | Recommend This Article (3)

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 December 16, 2013, at 5:47 PM, neamakri wrote:

    Your math is clear. But you have left out two factors; inflation and taxes. Let's see how this affects XOM at 2.6%.

    Inflation 2003-2010 was 4.3%. So I will be very generous and say inflation was only 3% for the entire 10 years shown above. Now add income tax on dividends and the total expense is 3.4% per year. That makes XOM a loss of 0.8% per year.

    Compounding 0.8% loss per year for 10 years yields a 7% total loss on your investment.

    I own some COP delivering 4% return in dividends, so it beats inflation and taxes (barely). Fools need to consider the whole picture before purchasing.

  • Report this Comment On December 16, 2013, at 7:42 PM, RobertBaillieul wrote:

    @neamakri I don't disagree that taxes and inflation take a bite out of returns, but I think your treatment of XOM is unfair. Some of XOM's free cash flow is reinvested back into the business to produce higher dividends in the future. XOM also returns most of its excess capital through share buybacks. This allows you to grow your position in a wonderful business while differing your tax liability until you sell.

  • Report this Comment On December 19, 2013, at 8:41 PM, PEStudent wrote:

    "You don't necessarily need smarts either -- just enough observation skills to identify wonderful businesses."

    "What does it require? The only skill you really need is patience..."

    This makes me cringe. How do you I.D. "wonderful businesses" unless you're able to identify their stability of growth in eps and revenue, understand risks involved in long term debt, evaluate their P/E or cash flow in terms of expected growth, etc?

  • Report this Comment On December 19, 2013, at 8:50 PM, PEStudent wrote:

    @neamakri. Inflation did not avg. 4.3% from 2003-2010. The only year in that period it exceed 4% was 2007 at 4.28%.

    According to the CPI, what cost $184.00 in 2003 cost $218.10 in 2010. That's an avg. 2.46% inflation for 7 years.

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