A little attention paid to dividends can really pay off. You may think of venerable blue-chip companies such as ChevronTexaco (NYSE:CVX), Citigroup (NYSE:C), DuPont (NYSE:DD), Ford (NYSE:F), and Verizon (NYSE:VZ) as stodgy and old-fangled, but think again. They pay generous dividends.
If you bought DuPont when its dividend yield (annual dividend amount in dollars, divided by share price) was 3.2%, you're very likely to get that 3.2% payout every year, regardless of what happens to the stock price. Couple stock appreciation with dividends, and you've got an appealing combination.
Note: Struggling companies may decrease or eliminate their dividends, but they try like heck not to, because it looks really bad. Firms aim to maintain or increase their dividends over time. Citigroup, for example, just hiked its dividend a whopping 75% -- but that's extreme and unusual.
Here's something investors rarely consider. Let's say you bought 10 shares of Stained Glass Windshield Co. (ticker: STAIN) for $100 each, and they pay a respectable 2.5% dividend. With a $1,000 investment, that amounts to an annual payout of $25.
But wait -- remember that dividends aren't static and permanent. Companies raise them regularly. A few years down the line, perhaps STAIN is trading at $220 per share. If the yield is 3%, it's paying out $6.60 per share (0.03 times $220 equals $6.60). That $6.60 is a 3% yield for anyone buying the stock at $220, but since you bought it at $100, to you it's a 6.6% yield. You paid $100 for each share and each one is kicking out $6.60 to you.
Decades pass. Your initial 10 shares have split into 80 shares, each currently priced at $120. Your initial $1,000 investment is now valued at $9,600. The yield is still 3%, paying $3.60 per share ($3.60 divided by $120 equals 0.03, or 3%). Since you own 80 shares, you receive a whopping $288 per year. Think about this. You're earning $288 in dividends in one year on a $1,000 investment. That's almost 28.8% per year (and growing) -- without even factoring in any stock price appreciation.
The yield for you has gone from 2.5% to 28.8% all because you hung on to those shares of a growing company. That's security! Even if the stock price drops, you're still likely to get that 28.8% payout.
Consider this: One share of Coca-Cola (NYSE:KO) bought in its first year has become roughly 100,000 shares through stock splits and dividend reinvestments, and that investment is now earning an annual dividend of more than $80,000.
Throw in the new tax laws -- which make dividend income less "taxing" -- and you have the recipe for a sweet investment.
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