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 \$65 per share, and at its current price, shares of J&J generate a respectable dividend yield of 2.6%. But not for me.

My dividend yield for Johnson & Johnson is approximately 3.9%. 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 3.9%. (Divide it by the current price and you get 2.6%.)

My yield is bigger because I bought the stock for less. The dividend is growing, too. When I bought 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

8/07

\$0.415

\$1.66

11%

8/06

\$0.375

\$1.50

14%

8/05

\$0.330

\$1.32

16%

8/04

\$0.285

\$1.14

17%

8/03

\$0.240

\$0.96

19%

8/02

\$0.205

\$0.82

14%

Over the past five years, the dividend has grown by an average of 15% 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 little more than \$4,000 will be kicking out more than \$560 per year to me at that time.

Fast-forward 20 years instead of 10, and let's assume that the dividend has grown by an annual average of 10%. That would put it at \$11.15, giving me a yield of 26%! (If it grows by an average of 14% instead, that will give me an effective 53% 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 3%. That means I'll have more than 700% in capital gains to go along with my 26% 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. Here are a few notable dividend hikers:

Company

Recent
Yield

5-Year Annualized
Dividend Growth

1.9%

14.4%

Fifth Third Bancorp (NASDAQ:FITB)

5.7%

11.8%

Linear Technology (NASDAQ:LLTC)

2.2%

36.1%

Nucor (NYSE:NUE)

0.7%

18.4%

Gap (NYSE:GPS)

1.7%

29.2%

T. Rowe Price (NASDAQ:TROW)

1.1%

16.3%

Medtronic (NYSE:MDT)

1.0%

21.3%

Data from Capital IQ, a division of Standard & Poor's.

Are these all good prospects for investment? Well, some are better than others, 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%. 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.

Selena Maranjian owns shares of Johnson & Johnson. Gap is a Motley Fool Inside Value recommendation and a Stock Advisor recommendation. Johnson & Johnson is a Motley Fool Income Investor recommendation. The Motley Fool is Fools writing for Fools.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.