I did an interesting little calculation the other day. You see, I own shares of Motley Fool Income Investor recommendation Johnson & Johnson, which I bought for about \$43 each back in 2002. The stock has since climbed to around \$62 per share, and at its current price, shares of J&J generate a respectable dividend yield of 2.7%. But not for me.

My dividend yield for Johnson & Johnson is approximately 3.5%. Better yet, I suspect it might be 13% or more in just 10 years.

Let me explain
Remember, my purchase price was roughly \$43 per share. If you take the current annual dividend amount of \$1.66 (paid out in quarterly installments, like most dividends) and divide it by my purchase price, you get a dividend yield of 4%. (Divide it by the current price, and you get 2.7%.)

My yield is bigger because I bought the stock for less. The dividend is growing, too. When I bought in back in 2002, the annual dividend was just \$0.82.

Here's a quick look at J&J's quarterly and annual dividend amounts in past years, plus the increase of each amount over the previous sum:

Date

Quarterly

Annual

Increase Over Previous

2/07

\$0.420

\$1.66

25%

2/06

\$0.330

\$1.32

16%

2/05

\$0.285

\$1.14

19%

2/04

\$0.240

\$0.96

17%

2/03

\$0.205

\$0.82

14%

2/02

\$0.180

\$0.72

13%

Over the past five years, the dividend has grown by an average of more than 17% annually. (Stay tuned -- I'll soon tell you how you can earn great returns from this steady dividend growth.)

Future shock
The reliability of J&J's dividend and the strength of the company's business helps me project my dividend yield into the future. (The company sports 45 consecutive years of dividend increases!) Let's assume 14% dividend growth per year over the next 10 years. If that happens, the current annual dividend of \$1.66 will turn into \$6.20. Given my \$43 purchase price, that gives me an effective 14% yield!

So my modest initial investment of not much more than \$4,000 will be kicking out more than \$500 per year to me at that time.

Fast-forward 20 years instead of 10, and let's assume that the dividend has "only" grown by an annual average of 12%. That would put it at \$14.47, which would give me a yield of 34%! (If it grows by an average of 14% instead, that will give me an effective 48% yield.) It wouldn't be unreasonable to imagine that at that time (in 2027), the stock will be trading with a then-current yield of 2% to 4%. That means I'll have more than 700% in capital gains to go along with my 34% yield.

How you can do it
These kinds of incredible gains can be yours, too, as long as you seek out solid, growing dividend payers and hang on for the long haul. You might think of Disney as a relatively sleepy company, for example (or a dopey or sneezy one), but it has hiked its dividend by an annual average of 22% over the past decade. Intel's average has been 31%. Here are a few other notable dividend hikers:

Company

Recent Yield

10-Year Annualized
Dividend Growth

Paychex (NASDAQ:PAYX)

2.6%

33%

Bank of America

5.3%

13%

Nike (NYSE:NKE)

1.3%

14%

Alcoa (NYSE:AA)

1.9%

11%

Eli Lilly (NYSE:LLY)

3.0%

9%

Applebee's (NASDAQ:APPB)

0.9%

45%

Merck (NYSE:MRK)

2.9%

6%

Are these all good prospects for investment? Well, some are better than others, of course, and there are probably even better prospects out there. If you find some solid companies paying growing dividends you should be able to rely on, you'll likely earn huge effective yields down the line. Not a bad deal, eh?

We'd love to introduce you to an even more promising group of dividend payers via our Income Investor service, which you can try for free. On average, its picks are beating the market to date; the last time I checked, they offered an average current yield of more than 4%, with 25 recommendations sporting yields of more than 6%. If Johnson & Johnson has taught us anything, it's that it pays to buy our dividends now. Click here to learn more.

This article was originally published on June 15, 2006. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson. For more about Selena, view her bio and her profile. Intel is a Motley Fool Inside Value recommendation. Disney is a Stock Advisor recommendation. Bank of America, Eli Lilly, and Johnson & Johnson are Motley Fool Income Investor recommendations. The Motley Fool is Fools writing for Fools.