Investing in best dividend paying stocks is known to build tremendous wealth over time. Here is a statistic that proves this, courtesy of S&P 500 Return Calculator.
According to this tool, S&P 500 has achieved an annual average gain of 7.43% in the last 50 years (since 1970). This does not include dividends.
By re-investing dividends, the S&P 500 has gained an average annual return of 10.55% in the same period (50 years). I don’t know about you but a 3% extra return thanks to dividends is a blessing in disguise.
Here is an example of how powerful dividend re-investment is.
According to research done by Hartford Funds, an investment of $10,000 in the S&P 500 in 1960 would be worth $431,397 as of December 2018, not including dividends.
By re-investing dividends however, the portfolio would be worth $2,459158. Stunning isn’t it?
How to Build Wealth with Dividend Paying Stocks?
This is the $64,000 question. We highlight 2 ways this can be achieved.
#1) High Yield Dividend Stocks
High yield is considered anything greater than 5%. High yield dividend stocks are favorites among retirees, who presently need income. Although high yield stocks can be good investments, there are many pitfalls to avoid. Our favorite high yield stocks are AT&T, Altria, Abbvie, etc.
#2) Dividend Growth Stocks
Some of the best dividend stocks in the S&P 500 are companies that are raising cash dividends between 10% to 30% annually, and growing their stock prices not only through revenue and earnings per share growth but also share buybacks.
As a result, their stock prices appreciate outperforming the S&P 500 index. This is called total return, which consists of dividend income + stock price appreciation.
One area of finding dividend growth stocks is the S&P Dividend Aristocrats Index. It is a group of companies that have consistently raised their dividends for at least 25 years, are included in the S&P 500 Index and carry a minimum market capitalization of at least $3 billion.
As of 2019, there are 57 such companies.
What is Dividend Growth Investing?
This strategy is for patient investors who want to become wealthy in 20 to 30 years, receive growing dividends over their lifetimes and leave fortunes behind for their loved ones.
Lets explain dividend growth strategy in 5 simple steps:
Step #1 Buy dividend paying stocks that are growing revenues, earnings per share and net profits.
Step #2 Hold on to these stocks through bull and bear markets and for decades at a time.
Step #3 Diversify across different sectors and industries so that if one industry gets crushed, there will others that will gain and minimize loss.
Step #4 Study each individual stock to ensure dividends are being funded with free cash flows, and not debt or stock issuance. This also means studying dividend payout ratios and cash flows from operations.
Step #5 Diversify across different geographies of the world, to ensure multiple streams of dividend income. There are exchange traded funds (ETFs) you can own that hold specific stocks in countries like Britain, Germany, Emerging Markets, Brazil, India, etc.
Dividend Growth Example
Let’s consider a real life example showing the dividend growth strategy. Consider two stocks below.
Stock #1 is Colgate-Palmolive. It currently has a dividend yield of 2.58% and over the last 5 years, management has grown its dividend at 3.8% annual clip. The dividend payout ratio is 61%.
Stock #2 is Visa (the card processing company). It currently has a dividend yield of 0.67% and over the last 5 years, management has grown its dividend at a very handsome rate of 20.11% annualized. The dividend payout ratio is 22%.
A hypothetical investor named Abby is 30 years old and has $10,000 to invest. She is looking to build dividend income, and take advantage of compounding over a long period of time.
Her objective is to one day, be able to live off dividend income.
Which of the 2 stocks above would be a better fit for Abby’s investment goals?
$10,000 invested in Colgate-Palmolive stock that grows its dividends at 3.8% annualized will pay out dividends of $258.14 in the first year. By the 30th year however, this same investment will be yielding dividend payments of $761 annually.
Not so bad right? Can Abby do better? Yes!
$10,000 invested in Visa stock that grows its dividend at 20% annualized will result in dividend payments of just $67 in the first year. This is because Visa has a very low dividend yield of just 0.67%.
However, by the 30th year, Visa will payout annual dividends of $13,620.62 assuming the dividend growth rate remains the same.
Over the long term, Visa is clear winner. This is because even though Visa initially yields a very low dividend of 0.67%, it is growing its dividend 5 times faster than Colgate-Palmolive.
A young investor should take advantage of this and invest in companies that are growing their dividends in double-digits for faster compounding.
Below are graphs showing healthy growth in annual dividend payments that a $10,000 would yield in 30 years from today.
While Colgate stock shows a steady uptrend line, Visa shows an explosive growth starting after year 20 when the power of compounding really starts to take effect.
In Year 20, Visa would yield annual dividends of $2,179.71. However by year 30, Visa would yield annual dividends of $13,620.62 due to the faster compounding (dividend growth rate) of 20%. Hence the chart shows a steep uptrend starting from Year 20.
So an annual check for $13,620.62 in dividends for an initial $10,000 stock investment 30 years ago sounds very good to investors. How much is that $10,000 invest worth today? 10 years ago (in November 2009), Visa stock was trading for $22 per share.
As of November 2019, Visa shares are trading for almost $180. So a $10,000 investment in Visa shares 10 years ago would be worth $81,818 which is a stunning performance.
200 Best Dividend Growth Stocks in Excel Spreadsheet
Download Microsoft Excel spreadsheet listing over 200 dividend stocks that have grown their dividends by at least 10% annually for each of the last 5 years.
The file is sorted by market capitalization and hence companies like Apple, JP Morgan, Visa, Bank of America and MasterCard appear in the top 5. You can sort by other fields such as P/E ratio, Revenue or Dividend Yield by following these steps.
Step #1 Highlight all cells and go to the Data tab and select Sort.
Step #2 Dialogue box will appear. Select “Sort by: Yield” and Sort On: “Values” and Order: “Largest to Smallest.”
Step #3 Select OK and the file will sort showing stocks with the highest dividend yields.
Our Top 10 Stock Picks
From above list, we pick our top 10 dividend stocks to buy today to enjoy capital appreciation that outperforms the S&P 500 benchmarks as well as collect growing dividend checks.