Dividend Growth Story

This is why dividend growth is so attractive.

Dividend Growth

Suppose that a dividend grows at 10% per year. The dividend amount will double in 7+ years.

The price will double if the price to dividend ratio remains the same. The price to dividend ratio is the inverse of yield. That is, price to dividend ratio equals 1/yield when yield is expressed as a fraction or 100%/yield when expressed as a percentage. The price doubles if the yield remains the same.

Not only do growing dividends increase your income, they produce capital gains.

Implications

Today’s stock prices are high, about twice what has been typical historically.

A dividend stock that grows at 10% per year helps to insulate you from a future downswing. Assuming that the market drops by half, you would retain your original capital after 7+ years. You would still have your dividend income.

Conclusions and Recommendations

This weakens the argument for staying out of the market entirely. It suggests having some market exposure. Not any stock will do. It is important to have the RIGHT exposure. Choose dividend paying stocks from quality companies that have a consistent history of increasing dividend amounts. Insist on an initial dividend yield of 2.5% to 3.0% or more.

Have fun.

John Walter Russell
September 27, 2007