{"id":30549,"date":"2012-06-29T13:38:02","date_gmt":"2012-06-29T17:38:02","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/how-to-build-wealth-with-dividend-paying-stocks\/"},"modified":"2012-06-29T13:38:02","modified_gmt":"2012-06-29T17:38:02","slug":"how-to-build-wealth-with-dividend-paying-stocks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/29\/how-to-build-wealth-with-dividend-paying-stocks\/","title":{"rendered":"How to Build Wealth with Dividend-Paying Stocks"},"content":{"rendered":"<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n<p>I recently received an email from a reader in his 50s who plans to retire in four years. He told me he\u2019s just getting started in investing and wanted some ideas for \u201crapid growth.\u201d<\/p>\n<p>Yikes!<\/p>\n<p>Hopefully, he\u2019s got a large 401(k), a pension, or an inheritance. Four years isn\u2019t enough time to get your finances ready for retirement if you\u2019re starting from scratch.<\/p>\n<p>While I like a good speculation as much as anyone, the reader\u2019s approach flies in the face of how to actually make serious money in the markets\u2026<\/p>\n<h2><strong>The Dividends Statistics Speak for Themselves<\/strong><\/h2>\n<p>If you\u2019re investing in stocks for the long term, the best thing you can do is buy stable companies with a track record of increasing their dividends and then reinvest those dividends.<\/p>\n<p>Sure, they may only be 3% or 4% dividends, but you\u2019ll be shocked at the way they can create significant wealth. I\u2019ll show you exactly what I mean in just a moment, but first, check out these eye-popping statistics on reinvested dividends:<\/p>\n<ul>\n<li>From 2000 to 2010, reinvested dividends were responsible for 87% of the S&amp;P 500\u2032s total return.<\/li>\n<li>From 1990 to 2010, reinvested dividends were responsible for 43% of the S&amp;P 500\u2032s total return.<\/li>\n<li>From 1871 to 2003, reinvested dividends were responsible for <strong>97%<\/strong> of the stock market\u2019s total return.<\/li>\n<\/ul>\n<p>Let\u2019s dig deeper\u2026<\/p>\n<h2><strong>What Dividend-Paying Companies Are Telling You<\/strong><\/h2>\n<p>The first question to ask yourself when investing in dividends is whether you want stocks that are Dividend Aristocrats or Dividend Achievers.<\/p>\n<ul>\n<li>A Dividend Aristocrat is an S&amp;P 500 company that has raised its dividend every year for the past 25 years.<\/li>\n<\/ul>\n<ul>\n<li>A Dividend Achiever has raised its dividend for the past 10 years.<\/li>\n<\/ul>\n<p>By raising the dividend, company executives are telling you two things\u2026<\/p>\n<ul>\n<li><strong>They\u2019re Committed to Shareholders:<\/strong> By returning capital to shareholders, companies are rewarding your faith in their business. Look at it this way: If you invested in your brother-in-law\u2019s restaurant and the business was doing well, at some point, you\u2019d expect him to start writing you checks. The same thing should hold true for the stocks you invest in.<\/li>\n<\/ul>\n<ul>\n<li><strong>They\u2019re Confident:<\/strong> Raising the dividend payment shows investors that the company\u2019s management is confident in their business now and in the future. It also shows that they take their dividend policy seriously. Executives are keenly aware that Wall Street doesn\u2019t like dividend cuts \u2013 and investors tend to punish dividend-choppers accordingly.<\/li>\n<\/ul>\n<p>And of course, if you receive more dividends every year, your yield on cost (i.e. the yield on the price you originally paid) rises. For example, if you buy a $50 stock with a $2 annual dividend, your yield is 4%. But five years later, if the dividend has risen to $3, your yield on cost is 6%, even if the share price has doubled to $100.<\/p>\n<p>So what\u2019s the best way to go about investing in dividend-paying stocks?<\/p>\n<h2><strong>Are You Looking At These Two Crucial Numbers? You Should Be\u2026<\/strong><\/h2>\n<p>After you\u2019ve identified a Dividend Aristocrat or Achiever, you want to be sure the company can continue to pay its dividend.<\/p>\n<p>You can do that by examining its payout ratio \u2013 the percentage of net income that\u2019s paid out in dividends. (And when it comes to determining income, I prefer to use levered free cash flow, as it\u2019s much harder for a company to manipulate the numbers.) Generally speaking, you want the payout ratio to be 75% or less. That gives the company plenty of room to still pay the dividend if net income or cash flow decrease in any given year.<\/p>\n<p>So once you\u2019re pocketing healthy dividends, why should you then reinvest them?<\/p>\n<p>Simple\u2026<strong> <\/strong><\/p>\n<h2><strong>A 12.4% Return While Underperforming the S&amp;P 500<\/strong><\/h2>\n<p>Here\u2019s a great example of the power of compounding reinvested dividends. It comes from one of my favorite stocks \u2013 <strong>Genuine Parts Co<\/strong>. (NYSE: <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/finance.yahoo.com\/q?s=gpc&amp;ql=1\">GPC<\/a>).<\/p>\n<p>Genuine Parts has increased its dividend every year for the past 56 years! That\u2019s an extraordinary record. To put that in perspective, the last time it didn\u2019t raise its dividend, President Eisenhower was in office, Elvis made his television debut on the <em>Louisiana Hayride <\/em>and <em>The Lawrence Welk Show<\/em> premiered.<\/p>\n<p>Needless to say, Genuine Parts is a strong performer. Over the past 10 years alone, its share price has doubled. And I expect it to keep rising, as earnings are projected to grow by more than 12% per year for the next five years.<\/p>\n<p>But for the sake of our example, let\u2019s assume a 9% annual increase in share price \u2013 less than the 9.6% average return of the S&amp;P 500 over the past 50 years.<\/p>\n<p>Let\u2019s say you bought 200 shares today (with GPC\u2019s current share price around $57, that would cost you around $11,400), reinvested the dividend and the dividend increased by 6.8% per year (the average of the past 27 years)\u2026 what would happen? After 10 years, your original $11,400 investment would be worth $36,659.98, growing by an average of 12.4% per year \u2013 even while the stock underperformed the S&amp;P 500 by over half a percentage point.<\/p>\n<p>I used the underperformance figure simply to illustrate a point. I actually expect Genuine Parts to <em>outperform<\/em> the S&amp;P 500 over the next decade.<\/p>\n<p>Now imagine if you have a portfolio of dividend-paying Aristocrat stocks doing the same thing. If you had a portfolio worth $100,000 and it had the same parameters of the Genuine Parts example above, but your portfolio simply matched the performance of the S&amp;P, your $100,000 would nearly triple in 10 years.<\/p>\n<p>And the power of compounding really gets going in the following decade, as your investment would soar to $891,000. That compares with $208,000 after 10 years and $520,000 after 20 years if you didn\u2019t reinvest the dividend.<\/p>\n<p>Unfortunately, for the reader I mentioned at the top, this is a long-term strategy and wouldn\u2019t get him to his goals in four years. But if you have a longer timeframe, reinvesting in quality dividend-paying stocks is an excellent strategy for creating and preserving wealth.<\/p>\n<p>Good Investing,<\/p>\n<p>Marc Lichtenfeld<\/p>\n<div>\n<a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=3EmFxude3Bc:T2woisk4XaM:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=yIl2AUoC8zA\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=3EmFxude3Bc:T2woisk4XaM:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=3EmFxude3Bc:T2woisk4XaM:V_sGLiPBpWU\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=3EmFxude3Bc:T2woisk4XaM:qj6IDK7rITs\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=qj6IDK7rITs\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=3EmFxude3Bc:T2woisk4XaM:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=3EmFxude3Bc:T2woisk4XaM:gIN9vFwOqvQ\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=3EmFxude3Bc:T2woisk4XaM:F7zBnMyn0Lo\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=3EmFxude3Bc:T2woisk4XaM:F7zBnMyn0Lo\" border=\"0\" \/><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/InvestmentU\/~4\/3EmFxude3Bc\" height=\"1\" width=\"1\" \/><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/SyndicationFeed\/~4\/Ic04r6MXyp8\" height=\"1\" width=\"1\" \/><\/p>\n<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Article by Investment U I recently received an email from a reader in his 50s who plans to retire in four years. He told me he\u2019s just getting started in investing and wanted some ideas for \u201crapid growth.\u201d Yikes! Hopefully, he\u2019s got a large 401(k), a pension, or an inheritance. Four years isn\u2019t enough time &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/29\/how-to-build-wealth-with-dividend-paying-stocks\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;How to Build Wealth with Dividend-Paying Stocks&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-30549","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/30549","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=30549"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/30549\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=30549"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=30549"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=30549"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}