Thursday, August 20, 2015

The Magic of Dividend Growth

One reason why we love dividend stocks is because of the yield. Every quarter (monthly or half yearly in some cases) we get a dividend check back from these great companies. 

Another reason is the dividend growth. Every year, the checks get bigger and bigger. 

What does this mean?

Let's use a simple example to illustrate the power of dividend growth. 

  • Let's say your investment is $100,000. 
  • The yield is 3%. 
  • The dividend growth is 10%. 
The first year, your dividend income will be $3000. The following year, your dividend growth will add to your income to $3300. 
In ten years, your income would be doubled. 

Of course, with magic of compounding and differences in CAGR calculations, it will be less than 10 years - but you get the picture. 

So, your original investment will be giving you around $6000. Yield on Cost around 6%. 

Again, with CAGR and compounding, this is actually a conservative number. If you take compounding into effect, your cumulative income can cover your original investment in around 14-15 years. 

This explains why your portfolio can become robust against market swings after 10 years.

So, in the long term, the portfolio total actually becomes less relevant and the income becomes more relevant. 

Now, the trick is to find quality companies with reasonable yields and good growth. 

Then, to buy these companies at good valuations. 

And then, to wait for the dividend growth and compounding to do their stuff, while you enjoy life. 


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