Investors looking for income often choose dividend-paying
stocks using dividend yield (annual dollar dividend divided by current
price) and dividend growth (annual percent increase in dividend)
as two key measures. Obviously, the higher the yield the higher
the dividend income. And increasing dividends mean more income in
the future.
The best-case scenario is to own stocks with high yields and
high rates of dividend increases. But these stocks are difficult
to find because most high-yield stocks have little room to increase
their dividends; they are already paying out most of their excess
cash.
So if you want to maximize your dividend income, should you favor
high yields or high dividend increases? Fortunately, there are many
combinations of yield and growth that can produce the same dividend
payouts. For example, suppose that you buy $10,000 worth of a stock
and hold it for 20 years, during which time you collect the dividends
each year. The following chart shows the total dividend accumulations
(collected) after year 20 for different yields and rates of dividend
increases.
The lowest total payout is $2,000 for a 1% yield with no dividend
increases. And the highest payout, $16,532.98, occurs for a 5% yield
with a 5% annual increase in the dividend. The six upward sloping
solid black lines represent the payouts for each rate of dividend
increase across dividend yields from 1% to 5%.
The horizontal dashed green line represents a total 20-year payout
of $10,000 that results from many combinations of dividend yields
and annual dividend increases. Two cases show that you can get $10,000
from a 3.025% yield and a 5% dividend rate increase or from a 5%
yield and a 0% dividend rate increase.
The vertical dashed green line shows the range of payouts for a
2% yield across dividend increases from 0% to 5%.
Related Articles:
Dividend Aristocrats
- A Few Truly Great Stocks
Look Here For Rising Dividends
Top 10
High Yield Dividend Aristocrats by Yield.
Why Dividends Matter
Posted May 9, 2008.
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