If you buy stocks for capital gains, it is a difficult market in which to invest and earn acceptable returns. If you purchase today’s hot stock, it’s very likely to crash tomorrow. The winners of 2020 are falling in 2021. And despite the big daily gains you see on the financial news and tremendous price volatility, the overall market has not done very well over the first two-and-a-half months of 2021. As I write this, the SPDR S&P 500 Trust ETF (SPY) is up just 4.2% year to date.
To illustrate the differences, my list of Dividend Hunter recommended preferred stocks (boring, stable investments) has returned 50% more than SPY. The other high-yield Dividend Hunter investments have gained almost 20% so far this year.
While stock market gains are nice, and it’s great when my Dividend Hunter recommendations outpace the broad stock market indexes, my focus is on income. Dividends get paid no matter whether the stock market is gaining or losing.
You can also generate very attractive growth with a dividend-focused investment strategy. Reinvesting dividends from high-yield securities will grow both the number of shares you own and, more importantly, increase your income. If you sock away some money in high-yield investments, put the dividends on automatic reinvest, and let the power of compounding work for a few years, you will be delighted with the results.
Compound dividend growth gives you a much more predictable strategy than trying to time the stock market. With dividend reinvestment, when share prices drop, your income grows even faster. What a deal!
Let’s look at a hypothetical example that closely resembles recommended Dividend Hunter investments.
You invest $25,000 into 1,000 shares of a high-yield stock priced at $25.00 per share. The investment yields 10%, with monthly dividends. A little math shows the dividend rate at $0.21 per share per month.
You buy the 1,000 shares and put the dividends on automatic reinvest, purchasing a few more shares every month, with each monthly dividend payment getting larger because you own more shares than you did the previous month.
If the share price stays at $25.00 (Not an accurate assumption, but future prices are unknowable), this is what the investment will look like in just three short years.
- The shares will be worth $33,704, a gain of 35%.
- The monthly dividend income increased from $210 the first month up to $283 paid in month 36. The income also grew by 35%.
I want to emphasize that no matter what happens to the share value, you can count on the income to grow significantly over your compounding period. The power of compound growth increases as you let the process work even longer.
If you let the above example compound for six years, the monthly dividend income will increase by 83%.
I like to point out that while you can spend cash dividends, letting them compound to build a retirement income is automatic and powerful. All you need is a list of safe, high-yield investments with which to get started.Like the ones on my Dividend Hunter recommendations list.
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