Why I Love Companies With Steadily Dividend Increases
Your income could double in seven years if your dividend grows by 10 per cent a year. Let me show you how:
Say you buy shares for £10 a share and they are paying an annual dividend of £0.37. You are immediately getting a yield of 3.7 per cent.
However, you picked a company that has been paying a dividend consistently for decades, increasing on average by 10% every year.
Now pretend that seven years have gone by. Look in the table at year seven. Your dividend income has almost doubled. From £0.37 when you bought the shares to £0.72 in year seven.
Add another three years, and your company just gave you an annual yield of 9.6 per cent based on your initial purchase price.
That’s right . . . 9.6 per cent!
How can that be?
Well, when you bought the shares at £10 the annual dividend, at purchase, was £0.37 per share, yielding 3.7%. But every year since, the dividend payment has increased by 10 per cent.
Ten years later, you’re receiving an annual payment of £0.96 a share. Divide that £0.96 by your original purchase price of £10 and multiply with 100 and you get an effective yield of 9.6 per cent.
Often, this type of company will just keep on increasing its dividends like clockwork, no matter what prevailing interest rates look like!
It is crucial that you understand this concept, known as “yield on cost”. After all, it highlights the hidden value of buying and holding shares with consistently rising dividends. And it is another way of looking at dividend yields currently available to you.
By default, most of these type of high quality companies will have fairly stable businesses, even-keel earnings, and established positions in their respective industries. There is no other way that they would be able to consistently pay out more and more money to their shareholders every year.
and you keep holding their shares, there is NO limit
to how high your effective yield can go.
And it’s exactly these types of high quality companies with increasing dividend payments that I would be considering for the Dividend Income Portfolio.
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