The Power of Increasing Dividends

How can increasing dividends build phenomenal wealth?

By harnessing the power of compound interest...

Reinvested dividends magnify an investment's typical return by making use of the power of compound interest.

Need an example?

Let's look at a traditional savings vehicle which takes advantage of compound interest...

A savings account.

Let's say your savings account pays 2.0% annually on a $34 initial deposit (in a moment, you'll see why I chose $34 as an example). Here's what that looks like...

Now, imagine how much money you would've earned in year ten if the 2.0% rate also increased on an annual basis along with the principal balance...

You would have a lot more. Right?

Well, that's typically what happens when you invest in a great company with consistent and increasing dividend payouts.

Need an example?

Below is a chart of actual dividends paid by PepsiCo, Inc. from 1999 to 2008. $34 would have purchased 1 share of Pepsi (PEP) in 1999 (this is why I used $34 in the savings account example).

In this case, PepsiCo stock is the perfect illustration of the power of compounding dividend returns...

Notice the "dividends paid" figure in year ten?

Also notice the yield in year one is substantially less than the year one savings account rate in the previous example. But the 2% savings account rate doesn't change, while the dividend yield on the initial investment in PepsiCo stock more than triples. By year six, it eclipses the yield on the savings account and keeps growing and growing.

From 1999 to 2008, the effective dividend yield for PepsiCo stock increased on an annualized basis of 13.57%...! That means, on average, your dividend yield just about doubles every five years. Now, imagine if you continue to hold your PepsiCo stock for another ten years while the dividend payments increase and increase and increase...

In the initial years, you do better with a savings account. But in the long term, you do far, far better with a great company's dividends.

That's the power of compound interest, and you can harness and amplify that power by investing in great companies with a history of consistent and increasing dividends.

So if you want to substantially increase your odds of beating the market and building a successful Roth IRA portfolio, find companies with a track record of increasing dividends...


http://www.your-roth-ira.com/dividend-payout-ratio.html