As a full-time researcher and writer about the stock market, I find it interesting that the mainstream financial news spends so little time discussing dividends, dividend focused stocks such as REITs and MLPs.
They often actually discuss dividend payments as a negative for stock investing results. This is contrary to my research that shows a combination of attractive yield and steady distribution growth may be the surest path to greater wealth and income. I have come to realize that there are two reasons why the financial press and investment advisors who appear on the financial networks either ignore or disparage dividend focused investing strategies:
- Dividend investing is not sexy or exciting enough for an advisor or money manager to be able to market and sell his services. These guys (or gals) want to show how smart they are by picking stocks that will jump in price over the next few months. In contrast, dividend investors know that slow and steady wins the race to wealth. A nice dividend payment every quarter, and a dividend rate increase every year is not exciting, but it will build serious wealth.
- The true wealth generating power of dividend growth stocks cannot be duplicated by a fund or separately managed account. Investment advisors sell these products to generate commissions and ongoing annual management fees. Dividend growth investing requires a system of smart stock picking and an investor needs just 10 to 20 good investments to produce wealth and income generating power. Too many stocks – such as in a fund or managed account – water down the growth potential.
When using dividends to produce overall portfolio growth, some simple math shows the way to double your account in 10 years. The rule of 72 shows how long it takes for money to double at a certain compound interest rate.
For example, if you invest and earn 4% per year, 72 divided by 4 shows that it will 18 years to double your money if you reinvest your gains. The rule also shows us that it takes about a 7% compounded return to double in 10 years.
With dividend growth stocks, it is the growth rate of those dividends that will provide the double-double return. When a company increases its dividends at a steady rate, the share price will increase at the same rate to keep the yield fairly constant. So if you have a stock that yields 5% and the dividend grows by 7%, after 10 years, the stock price will have doubled, the dividend rate will have doubled and the stock will still have a 5% yield on the current share price. However, those shares you bought 10 years earlier will be earning a fat 10% yield on your original investment value.
To show the how the dividend growth strategy works as I practice it, here are a couple of stock market investments that illustrate the results that can be produced by buying into companies that pay a currently attractive yield and have business models focused on growing the dividends paid over time.
W.P. Carey Inc. (NYSE: WPC) is a triple-net type of REIT that owns, manages and leases single tenant commercial properties in the U.S. and Europe. The company also generates fee income from the management of non-traded REITs. W.P. Carey has one of the best dividend growth records of all REITs.
Using our math from above 100 shares of WPC purchased on January 1, 2005 (about 10 years ago) would have cost $3,500. The dividends paid in 2005 would have produced a 5.1% yield that year. W.P. Carey has increased its dividend every year (actually every quarter) and over the last 9.5 years, those 100 shares would have generated $2,195 in dividends. The 100 shares are now worth $6,900 and with the doubling of the quarterly dividend rate, the stock still yields 5.2%.
The current yield on the original investment amount is up to 10.3% and your original investment of $3,500 would now be worth $9,095 adding the value of the shares and the dividends paid. That’s 160% return.
WPC shows no signs that in will not continue to grow the dividend every quarter.
Kinder Morgan Energy Partners LP (NYSE: KMP) has been publicly traded since 1992 and is one of the oldest master limited partnership (MLP) companies. KMP provides energy pipeline, transportation and storage services throughout North America. As KMP’s network of energy infrastructure assets have grown, so have the distributions paid to investors.
To mirror the WPC example, 100 KMP units purchased on January 3, 2005 would have cost $4,357. An investor would have earned a 7.2% yield that first year of ownership. In the 9.5 years since, the distributions on the 100 units have increased every year and total up to $4,154.
The 100 units are currently worth $9,288. At the current distribution rate, the yield on the original investment amount is 12.7%. KMP will be absorbed into Kinder Morgan, Inc. later in 2014.
These two steady dividend paying investments have produced close to 300% total returns over the last 10 years. The companies kept paying and increasing their dividends right through the 2008-2009 bear market. In comparison, the S&P 500 is up 77% over the last 10 years, earning less than 2% per year in dividends over that time.
For the subscribers of The Dividend Hunter newsletter, I am on a constant hunt for existing and new REITs and MLPs that will produce similar results to those outlined above. For the September newsletter I was excited to find and recommend Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI) a one-year old, REIT focused on energy efficiency and renewable energy real estate projects. HASI currently yields 6% and I forecast a 10% dividend growth rate for the next several years at a minimum.
When looking at dividend stocks to add to your portfolio you should strongly consider only those with a history of raising dividends. This is important not only for the reasons demonstrated in the two examples above, but also because historically companies with a history of consistently raising dividends are nine times less likely to cut them than companies that never raise dividends. I look at this as an extra layer of protection for your money.
If you’re interested in building a portfolio with a monthly income stream from stocks that raise their dividends I suggest you check out my new Monthly Dividend Paycheck Calendar. It’s specifically designed so you get dividend payments every month, often several times a month. The first payment is coming up soon. CLICK HERE.