Do you remember the last time you bought a house? Sure, putting in the bid, taking care of the inspection, and getting the appraisal are all stress-inducing. But the scariest part of the process is sitting down to sign papers -- and seeing the "Truth in Lending" document.
Oh, you might have gotten a lovely 6.25% fixed interest rate on your loan of $250,000. But what that little piece of paper tells you is that over the course of the 30-year mortgage, you're going to pay $304,147 in interest -- 122% of the amount you borrowed to start with.
Ouch. Compound interest strikes again.
Add up your mortgage, your credit cards, and your auto loans, and you're paying out a pretty penny for the privilege of borrowing all of that money. But you can make compound interest work in your favor.
Turning the tables
Dividend-paying stocks are an important part of any portfolio, but if you're paying gobs of money out in loan interest, they're even more important. Why? Because in the case of dividend-paying stocks, compound interest pays you.
Picking up undervalued shares of stocks with a proven track record of raising dividends can end up paying you back big time down the road. Consider the return on $10,000 invested in each of these stocks 20 years ago:
|
Company |
Value Today |
Annual Dividends |
Annual Dividends / Initial Investment |
|---|---|---|---|
|
Wells Fargo |
$132,925 |
$6,489 |
65% |
|
Procter & Gamble |
$130,196 |
$3,281 |
33% |
|
Bank of America |
$44,599 |
$4,290 |
43% |
|
GlaxoSmithKline |
$51,212 |
$2,388 |
24% |
|
DuPont |
$29,428 |
$1,094 |
11% |
|
Caterpillar |
$93,074 |
$2,042 |
20% |
|
Anheuser-Busch |
$78,561 |
$1,679 |
17% |
*Assumes $10,000 investment on June 24, 1988, and no dividend reinvestment.
The obvious
Those annual dividends have been racking up over 20 years -- and 20 years of dividends can exceed even that initial $10,000. Not too shabby, right? On average, investors in these seven companies are pulling in yields of 30% on their original investments. Now that is putting compounded growth on your side.
See, investors have long known that dividend-paying stocks not only buffer your portfolio against a volatile market. Thanks to compounded dividend growth, these stocks can also offer jaw-dropping payouts when stacked against their initial investments.
Jeremy Siegel of the illustrious Wharton School has proved that the easiest, safest route to posting market-crushing returns over the long haul is simply to broadly invest in blue-chip dividend payers.
Put time and growth on your side
Dividend payers offer a long-run path to fat payouts and market-beating performance -- and the market's recent tumults have left a shockingly large number of blue chips at discounted prices. That gives dividend junkies like us and Motley Fool Income Investor advisors James Early and Andy Cross plenty of room to run.
As the lead analysts on Income Investor, which has delivered returns better than 9 percentage points ahead of the market since the service's inception nearly five years ago, James and Andy offer up two fresh stock ideas every month. To read about their past recommendations and their five best ideas for new money, we offer a free 30-day trial without obligation. Click here to get started.
Todd Wenning owns shares of Procter & Gamble. Joe Magyer does not own shares of any companies mentioned in this article, though he's been known to perform "deep dives" on Anheuser-Busch offerings. Bank of America and GlaxoSmithKline are Income Investor recommendations. Anheuser-Busch is an Inside Value pick. The Motley Fool has a disclosure policy.
