Investors are always searching for the next big thing and seeking higher returns from their capital. In the rush to find emerging opportunities, however, it can be easy to overlook one of the safest, most lucrative and most historically secure investment strategies. This strategy is investing in
Why Does This Strategy Work?
The beauty of investing in stocks that raise their dividends each year is that the annual yields you see on your initial investment will continue to increase as time goes on, regardless of actual share value. This fact results in two massive advantages. The first is that, over a long enough period of time, the annual yield compared to your original investment can reach extremely high rates. Secondly, this investment strategy will make your portfolio less vulnerable to the economic downturns, inflation spikes and other situations that normally trouble investors who do not invest in stocks with strong dividend growth rates.
What Kind of Yields Can You See?
Although the dividend growth rates of individual stocks will vary from year to year, it’s possible to demonstrate the power of this investment strategy by giving a hypothetical example. Consider the case of a stock that costs $100 per share a pays a dividend yield of 3 percent. Assuming this stock increases its dividend by an average of 8 percent per year, the divided would grow to $4.41 over five years, $6.48 over 10 years and $13.98 over 20 years. In other words, by the time you reached the 20-year mark, this stock would be returning nearly 14 percent on your initial investment each year.
Enhancing the Strategy With Dividend Reinvestment
In addition to allowing the dividends to grow over time, you can also pair this strategy with dividend reinvestment if you don’t mind deferring the income from your investments. By reinvesting the dividends you receive, you can increase the number of shares you own in the company. As a result, by the time you choose to take the dividend payments for income rather than for reinvestment purposes, you will have a much larger number of shares each generating a dividend payment.
The strategy of investing in stocks with long histories of dividend growth can be an excellent way to enhance the long-term return of your portfolio. If you are looking for growth and a strong potential for income from your portfolio, this investment strategy may be worth pursuing.