I did an interesting calculation the other day. You see, I own shares of Motley Fool Income Investor recommendation Johnson & Johnson, which I bought for about \$43 each in 2002. The stock has since climbed to around \$63 per share, and at its recent price, shares of J&J generate a respectable dividend yield of around 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. I'm talking here about my effective yield, based on my purchase price.

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 an effective 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

8/2007

\$0.415

\$1.66

11%

8/2006

\$0.375

\$1.50

14%

8/2005

\$0.330

\$1.32

16%

8/2004

\$0.285

\$1.14

19%

8/2003

\$0.240

\$0.96

17%

8/2002

\$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 \$6.15. 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 an effective yield of 26%! It wouldn't be unreasonable to imagine that at that time (in 2028), the stock will be trading with a then-current yield of 3%. That would put the stock price at \$372 per share, meaning 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. You might think of Disney (NYSE: DIS) as a relatively sleepy company, for example (or a dopey or sneezy one), but it has hiked its dividend by an annual average of 24% over the past decade. Intel's average has been 31%. Here are a few notable dividend hikers:

Company

Recent
Yield

10-Year Annualized
Dividend Growth

Wells Fargo (NYSE: WFC)

3.9%

14%

Coca-Cola (NYSE: KO)

2.5%

9%

Wal-Mart (NYSE: WMT)

1.8%

23%

Walgreen (NYSE: WAG)

1.0%

12%