The Best Kind of Growth

Dividends provide a tremendous service to the shareholders of companies that pay them. Of course, there's the cash itself. Believe it or not, though, the current value of a dividend may very well be the least important part to an investor.

Over time, the growth in that payment can be worth far more. Just as small companies can grow to become big companies, small dividends can grow to become big.

After all, as a business grows, so does its ability to pay dividends. Small companies tend to have the most room for growth. As a result, if you find a small, dividend-paying company that's on the way to becoming a large, dividend-paying company, you just might end up with the best of both worlds.

A case study
Take Waste Industries (Nasdaq: WWIN  ) , for example. It paid its first semi-annual dividend of $0.08 per share as of Nov. 18, 2003. That day, its shares closed at $9.10 each -- equating to a modest annual yield of about 1.8%. Yet, thanks to the relentless growth of its business and a desire to reward shareholders, those dividends are now $0.12 a quarter.

In other words, the company's dividend has skyrocketed from $0.16 annually to $0.48 annually in less than four years. That's a triple in my book. It also means that investors who bought when the dividends were just starting out are already seeing more than a 5% yield on their initial purchase price.

Of course, receiving 5% of your initial investment back each year may not be enough to excite you. Remember, though, that four years is just the start. With a little bit of patience, the rewards can really start piling up. Check out the results from these relentless dividend growers after 15 years:

Company

April 1992 price*

Current
annual
dividend

Yield on
initial price

Lowe's (NYSE:LOW)

$1.18

$0.20

17.0%

Fifth Third Bancorp (NASDAQ:FITB)

$8.00

$1.68

21.0%

Freddie Mac (NYSE:FRE)

$9.33

$2.00

21.5%

Corus Bankshares (NASDAQ:CORS)

$4.41

$1.00

22.7%

Duke Realty (NYSE:DRE)

$4.73

$1.90

40.2%

Paychex (NASDAQ:PAYX)

$1.35

$0.84

62.4%

*Split-adjusted

Each one of these companies paid a dividend in 1992, and each has relentlessly grown its dividends along with its business since then. As a result, investors who bought in 15 years ago have been substantially rewarded along the way. Today, their annual rewards of ownership add up to a tremendous fraction of their initial investment, and as these businesses continue to grow, so too should their dividends.

You don't often see that kind of current dividend growth among the mega-cap behemoths. In Motley Fool Hidden Gems, Fool co-founder Tom Gardner actively prospects for the special kind of strong, small companies that reward their owners well. Companies that small and that financially strong are truly diamonds in the rough.

But if you find one, the long-term rewards can be fantastic. If you're ready to take part in the next generation of top-tier total growth, click here to get started. Since inception, Hidden Gems picks have collectively outperformed the market 53% versus 19%. Or if you're just curious about how Tom does it, you can take Hidden Gems for a risk-free 30-day trial starting here.

At the time of publication, Fool contributor Chuck Saletta owned shares of Waste Industries, Fifth Third Bancorp, and Lowe's. The Fool has a disclosure policy.


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