The Value of Dividend Growth

Many people don’t think about the future dividend growth and how it affects your return on your original investment. For example lets look at an investment in General Electric (GE). Your purchase price is $16.95 (going by 12/15/08 closing price) and the dividend is at $.31 per quarter. You would be making about 7.32% per year on your investment at the current dividend rate of $.31.  I got the numbers by dividing the yearly dividend $1.24 into $16.95.

Over the past 10 years they have almost TRIPLED their dividend per share.  OK lets say 10 years from now they are paying $.93 per share.  That would be a return of

21.95% per year!!! Even though yahoo may say the dividend yield is only 5% you would base it on the purchase price of $16.95 instead of the current price. I love seeing those % returns. Also as dividends are increased the share price goes up. So when they are paying $.93 per share the share value could be around $70, which is over quadruple the price you originally paid.

Same thing with any dividend company… SO, AB, PEP, or BAC as long as its a company that continues to increase their dividends yearly. The above example is an extreme case and most stocks wouldn’t create the high of a value in a short time, but with any dividend paying company (SO, AB, PEP, BAC, etc…) the same theory works as long as the company consistently increases dividends each year. While the company says they are paying a 5% dividend, they may be paying you 10% because you bought the stock 5 years ago when they were paying $.20 per share compared to $.40 per share now. If your dividend payment doubles over the past 5 years, so does your yield compared to your purchase price.

If I lost you while trying to explain this theory please let me know.

Just remember to give investments time to grow. They will eventually grow to where they can supplement your income for retirement and hopefully more if you save diligently. (When I say YOU, I mean me too!)

***Disclosure:  I currently do not have holdings in GE, SO, AB, PEP, or BAC at the time of this post.***