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If You Invested $24,370 in This Top Stock 5 Years Ago, You'd Be Making $1,000 in Dividends This Year

By David Jagielski – Aug 4, 2021 at 6:31AM

Key Points

  • Eli Lilly has been increasing its dividend payments at a rapid rate over the past five years.
  • Although it is only yielding 1.4%, investors who bought shares earlier are making much more on their initial investments.

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Plus your investment would be worth nearly three times its original value.

A great reason to hold a dividend growth stock for the long term is that its payouts will increase over time. That means that you are earning more on your initial investment with each annual increase. Suppose, for example, you are collecting $100 in dividend income this year. If the company you invested in were to increase those payouts by 5% each year, then after 14 years you would be collecting double that amount. That's why investing in dividend growth stocks can be a great way to supplement your income.

One stock that has been a great income investment in recent years is Eli Lilly (LLY -0.37%). The healthcare company has not only delivered some fantastic returns for investors, but it has also been hiking its payouts. 

A person counting money in their living room.

Image source: Getty Images.

Eli Lilly has raised its dividend payments by 67% in just five years

In 2016, Eli Lilly was paying its shareholders a quarterly dividend of $0.51. Today, its payments of $0.85 are 67% higher, having grown at a compounded annual growth rate (CAGR) of 10.8% since then. That's well above the rate of inflation. However, the stock isn't a Dividend Aristocrat, and Eli Lilly has only been consistently raising its dividend payments since 2015. The recent rate hikes also aren't a guarantee that Eli Lilly will continue making them in the future -- dividends are always at management's discretion. 

What may come as a surprise to you is that even though the company has been increasing its dividends by such a large rate in recent years, it still only yields 1.4% today, which is right around the S&P 500 average. The reason is simple: Although Eli Lilly's dividend payments have increased over time, so has its share price -- the other component of dividend yield calculation. In five years, the stock has soared a whopping 194%, while the S&P 500 has increased by 102%.

Buying five years ago would have set you up for some incredible gains and dividend income

As of the end of July 2016, Eli Lilly's stock closed at $82.89. At the time, you could have invested $24,369.66 in the stock to own 294 shares. Collecting $0.51 per share every quarter would have generated $600 in annual income for your portfolio. Today, those same shares would now generate $1,000 in recurring income at the current dividend rate. You would be earning more than 4.1% of your initial investment -- far higher than the 1.4% yield new investors will collect today. On top of the increase in dividend income, your investment would also be worth more than $71,000.

Investing in a company that is not only growing but raising its payouts gives investors multiple ways to profit, which is what makes Eli Lilly such a special investment to hang on to. It's certainly not the only stock that offers the opportunity to profit from both capital appreciation and growing dividend income, but it does serve as a reminder of the benefits of just buying and holding.

Is Eli Lilly still a good buy today?

Today, Eli Lilly's payout ratio sits at about 50%. That's a relatively low number, which suggests there could be room for more rate hikes ahead. 

The only apprehension I would have about the stock today is regarding its valuation. With a price-to-earnings multiple of 37, it isn't a cheap buy -- the average stock in the Health Care Select Sector SPDR Fund trades at 27 times its profits. Eli Lilly also isn't known for excessively high growth to justify such a premium, either. From 2016 to 2020, its top line rose from $21.2 million to $24.5 million, for a growth rate of just 16%.

But there is hope that that could change. In June, the U.S. Food and Drug Administration (FDA) granted a breakthrough therapy designation for its Alzheimer's drug, donanemab, which could expedite its approval process. Some analysts believe the drug has the potential to take market share away from Biogen's Aduhelm, which the FDA approved earlier this year.

The growth potential for Eli Lilly is a good bonus, but investors should be careful not to expect the company to reproduce the impressive returns it has generated over the past five years. Eli Lilly is a solid income investment to add to your portfolio, but expecting 10% dividend increases and significant gains every year might be a tad too optimistic; many analysts don't see the stock rising much higher than $250 in the near term.

For long-term investors, however, that's a different story, and Eli Lilly could be a solid stock to buy and hold for decades.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.

Stocks Mentioned

Eli Lilly And Stock Quote
Eli Lilly And
LLY
$373.38 (-0.37%) $-1.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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