His Dividends Are Bigger Than Mine

The article "My Dividends Are Bigger Than Yours" always makes me smile. Many of my pieces review various boneheaded blunders I've made in my investing life. But that one covers something I did right: Buying a healthy, growing, dividend-paying company -- and hanging on tight.

The stock in question is Johnson & Johnson, which I bought for about $43 in 2002. Shares have since climbed to around $68 apiece and offers today's investors a respectable dividend yield of around 2.7%. As I explained, though, my dividend yield for Johnson & Johnson is about 4.3%. Better yet, I suspect it might be 13% or more in just 10 years.

Since I paid $43 per share, and I now get $1.84 per share in annual dividends, I figure my yield is now 4.28% ($1.84 divided by $43). Better still, as the dividend grows over time, my effective yield will also grow. (It was 3.9% just a little while ago.)

The power of time
I'm not the only investing genius around, though. Plenty of investors -- like Bob W., who emailed me after reading my article -- figured out the power of dividends long before my own light bulb went on.

I bought my shares of J&J back in 2002; Bob bought shares of General Electric in 1987, a full 15 years earlier. What's his effective yield today? Roughly 30%! (I bought General Electric, too -- in 2006. My otherwise very respectable 4.5% effective yield pales in comparison.)

Furthermore, Bob's Wells Fargo shares, bought in 1986, now bring in an effective yield of more than 75% relative to his original purchase price. Around the same time, he bought into a major bank, today reaping an effective yield of 45%. He also snares a 79% yield on a telecommunications company.

What's his secret? Well, just as I did with Johnson & Johnson, he bought into healthy, growing, dividend-paying companies and hung on. Note that most of the purchases he mentioned to me were from 1986 and 1987. He didn't specify dates, but I wouldn't be surprised if he managed to snag shares of great companies soon after the Black Monday crash of October 1987.

Start yesterday, start today, start now
If you're feeling any pangs of jealousy right now, go research companies that interest you -- some may end up being stocks for the rest of your life. The first months of 2008 haven't been too kind, and many great companies have seen prices plummet.

When prices fall, yields rise, making this a particularly attractive time to find some great dividend payers. (Look also for companies that have been hiking their dividends regularly and significantly.)

To give you a few starting points, I ran a screen for companies with yields greater than 2%, P/E ratios of 25 or less, net profit margins greater than 10%, and estimated earnings growth rates for the next five years of at least 10%:

Those aren't necessarily companies you should buy right now -- at least, not until you do some further digging. The more research you do, the better your odds of earning the best returns possible.

If you'd rather let someone else do some of the heavy lifting, check out our Motley Fool Income Investor service free for 30 days. Advisors James Early and Andy Cross' picks are beating the market by more than seven percentage points, and their average yield of more than 5% will help you position your portfolio well.

Find some great dividend-paying investments today, and in 15 or 20 years, your dividends may be better than mine, too!

This article was originally published on March 28, 2008. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson and General Electric. Johnson & Johnson and Paychex are Motley Fool Income Investor picks. NYSE Euronext is a Motley Fool Rule Breakers recommendation. The Motley Fool isFools writing for Fools.