As author of the Fool's dividend-oriented newsletter, Motley Fool Income Investor, one of the most common emails that I receive goes something like this:
Dear Mr. Emmert,
In order to meet my income needs, I need some investment ideas that will produce a yield in the 10%-12% range. What would you suggest?Sincerely,
Ihavunreal X. Pectations
P.S. I prefer to take very little risk.
P.P.S. I love your work, but what's with the hat?
Ah, I love the easy ones. As you might suspect, my response to this question -- in its varied forms -- is always the same, basically consisting of a polite version of "Holy sweet potatoes, please tell me you have a plan B."
The truth is, the 10% yield is elusive in its own right -- and that's putting it mildly. But, worse still, it's nearly impossible to find when you expect to achieve it without simultaneously swallowing a big dose of risk.
The good news
OK, so that's the bad news. The good news is that -- despite what I just told you -- the art of achieving the double-digit dividend does exist. The trick is that it exists only for those who have a little patience and a fairly long-term investment horizon.
The irony here is that, if Mr. Pectations had sent me that letter 30 years ago, he'd probably be sitting on his own private island enjoying 20% yields as we speak. Alas, the Mr. Pectationses of the world come to me today, plunk down their cabbage, and expect to earn a double-digit yield tomorrow. And that means they're likely to be disappointed.
Sure, there are the occasional opportunities such as Annaly Mortgage Management
But again, there is a very real way for virtually all investors to achieve extremely safe, stable, and virtually guaranteed double-digit dividend yields, provided they start now.
Choose well and let it ride
One of the most powerful yet least appreciated aspects of dividend investing is the fact that the best dividend payers tend to increase their dividends year in and year out. When you couple that with the fact that your cost basis for a given investment typically remains the same, you've just discovered the catalyst behind the amazing, growing dividend yield. Come one, come all.
In other words, when you buy a successful dividend-paying company, you're not just buying the dividends of today, but the dividends of tomorrow. So, if you purchase shares in a company that yields 3%, certainly you're locking in a 3% annual yield today, but you're also going to enjoy the dividend-growth of tomorrow.
So, if your company increases its dividend by 9% annually, you'll have an effective annual yield on your original investment of nearly 11% in just 15 years. That's a double-digit yield on your original investment, and you didn't have to do anything beyond making your initial purchasing decision in order to achieve it.
Most investors quickly lose sight of the growth rate in their dividends because the information isn't readily available -- it won't show up as the yield on your pop-up quote service. It takes a little doing to keep up with it, but trust me when I tell you it's well worth the effort.
The real deal
"Great," you say, "but there are probably only a few such investments in existence, and it's nearly impossible to find them, right?" Not so. Let's look at a few real-life examples to drive the point home.
Ever heard of General Electric
Though on the surface it may not seem as powerful, PepsiCo
Need more? Johnson & Johnson
Now, don't get me wrong here. Effective yield is not the be-all and end-all. Today's yield -- not your effective yield -- is still the important attribute when comparing investments and making a decision for today's investment dollars. So don't trick yourself into thinking you have to beat your 30% effective yield when evaluating a new place to stash some cash -- because that's just not going to happen.
Be sure to keep in mind, though, that the next time you go looking for 10% yields, they may well already be sitting smack-dab in the middle of your portfolio.
Mathew Emmert loves 20% yields, jellybeans, and French burnt peanuts. This may come as a shock, but he's the chief analyst of Motley Fool Income Investor . He owns shares of Annaly Mortgage, General Electric, and PepsiCo. The Fool has a disclosure policy .