Let the dividends lead you to the promised land | Smart Change: Personal Finance
(Steven Walters)
The comprehensive investment portfolio should include companies that pay dividends. As a shareholder, dividends are a way to reward them for holding your investment and, when used in the right way, can make up a good portion of your total portfolio return. However, not all companies that pay equal dividends are created. If you are looking for consistent and well-established companies, look no further than Dividend Kings.
Here’s why you should let them lead you to the Promised Land.
Image source: Getty Images.
They have stood the test of time
The Dividend Kings have earned their honorable title because they have been able to increase their annual dividend for at least 50 consecutive years. Being able to hold a dividend for so long is an achievement in itself, but being able to increase it for those many years is an entirely different achievement. With Dividend Kings, you know you are investing in companies that have stood the test of time.
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Any company with the title of Dividend King in 2022 has increased its dividend since 1972, at least. During that time, these companies have successfully navigated some of the toughest economic conditions the United States has ever seen. Profit kings have succeeded in achieving this by:
- Black Monday (1987).
- The collapse of the dot-com bubble (2000).
- The Great Depression/Financial Crisis (2008-2009).
- COVID-19 pandemic (2020).
There were many powerful companies that had to cut their profits during those times, including notable Fortune 500 companies, but Dividend Kings stood tall and weathered the storm.
THERE IS POWER IN DRIP
While receiving dividends can be a great source of income, the real power comes when you enroll in a brokerage firm’s Dividend Reinvestment Program (DRIP). With DRIP, any cash dividends you receive are automatically used to buy more shares in any company or fund that you paid them. This adds to the power of compound interest.
Let’s imagine that we have two funds – one with no dividends and one with a dividend yield of 2.5% – and we have contributed $500 to both per month, earning an annual return of 10% (the historical average of the S&P 500 index). Assuming the dividend yield remains the same, here’s what the account totals will look like in 25 years:
| finance | profit return | Contribution amount in 25 years | Total account after 25 years |
|---|---|---|---|
| chest 1 | 0% | 150 thousand dollars | 590 thousand dollars |
| Box 2 | 2.5% | 150 thousand dollars | $864,000 |
Data source: author accounts
With no extra effort, receiving (and reinvesting) the dividends increased your total account by about $274,000. As a dividend investor, it helps to delay receiving cash payments until retirement, when having an additional source of income is more beneficial. Until then, you can reap big rewards with DRIP. Even if you manage to put $500,000 into a fund with a 2.5% return, that’s $12,500 in annual payments.
More importantly, it helps to invest in Dividend Kings because, in good faith, you can not only count on profits, but also expect them to increase. Your dividend increases, your number of shares increases, and you receive higher payouts; It’s a cycle that you want to get stuck in.
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