One of the great joys of writing about personal finance is to read and write about the successes of common investors -- Fools like Rob Ketterer, a government consultant who began with $500 in a basket of stocks including ExxonMobil and Cisco Systems (NASDAQ:CSCO), which went on to post dynamic returns over long periods of time, and who today owns a house and three rental properties.
Rob's story is great, but it's not unique. One Foolish reader, Tim S., reported that his grandfather invested $350 in Pfizer (NYSE:PFE) in 1960. By 2006, thanks to the awesome power of dividend reinvesting, he owned 9,100 Pfizer shares paying $10,500 annually in dividends. And even with Pfizer's recently announced dividend cut, he'll still be earning over $5,500 annually -- over a 1,500% yield on his original investment.
Really?
But you can one-up Tim's granddad. He began investing long before the Roth IRA was available. You, on the other hand, are young, good-looking, and in your prime earning years.
If you're married and your total adjusted gross income (AGI) is less than $159,000 you can contribute the full $5,000 to a Roth for the 2009 tax year, up until April 15, 2010. So can your single friend Mike, who, at $72,000 in AGI, is well below the $105,000 income limit for a Roth contribution. Wonderful!
Be a rich turtle
But don't get complacent. A Roth alone won't make you or Mike rich. Other investment vehicles, such as a traditional IRA, will allow you to invest in stocks just as a Roth will. What you both need to do is maximize the earning potential of your investments.
Which brings us back to Tim's story. Today, dividend distributions, even when reinvested, are typically taxed at a 15% rate. Not so with a Roth. Were you to build and regularly contribute to a portfolio of large stocks that have a history of increasing dividends, you could do as well as Tim's granddad did, except that you'd be collecting your dividends tax-free.
Put differently: Imagine collecting a tax-free pension. That's what a Roth can help you and Mike do. Because by reinvesting those tax-free, you'll own more and more shares of stock and receive more and more each year in dividends.
They might be dividend giants
The key to making this happen is to fill your Roth IRA with companies that have shown a willingness to raise their dividends year in and year out. With that in mind, here's a list of large caps that yield more than 2.5% and have increased their dividends by an average of more than 20% annually over the past five years:
|
Company |
Yield |
Five-Year Average Annual Dividend Growth |
|---|---|---|
|
Intel (NASDAQ:INTC) |
3.7% |
46.9% |
|
Valero Energy (NYSE:VLO) |
3.3% |
40.3% |
|
McDonald's (NYSE:MCD) |
3.7% |
32.4% |
|
Lockheed Martin (NYSE:LMT) |
3.4% |
25.8% |
|
Medtronic (NYSE:MDT) |
2.6% |
22.4% |
Source: Capital IQ, a division of Standard & Poor's.
Bear in mind that this isn't a comprehensive list. Nor is it infallible. Be sure to do your own due diligence before investing in any of these stocks.
Dividend reinvesting is a wonderful way to rock your Roth and get rich in the process. But it isn't the only path. Want more ideas? Learn more about IRAs and investing with these great resources:
- Take a look at our IRA collection page.
- The top 4 places to invest now.
- 5 great ways to trim your taxes.
