Dividend growth stocks (DGS) are amazing investing vehicles.
They become more productive each year while we sit and watch. Returns are compounded and we benefit from
the 8th wonder of the world. But that’s not the end of the story.
DGS drive up the yield
on cost of an investment. This means dollars are working harder, the time
to double money shrinks, and path to financial freedom grows shorter.
For instance, a stock with a constant 3% yield over 10 years
produces a compound annual growth rate (CAGR) of 3%. However, if a similar
stock paying 3% when purchased grows its dividend by 3% each year during the
same period the CAGR approaches 3.5%.
The half point difference doesn’t sound
like much, but when the two figures are plugged into the Rule
of 72 the 3% rate takes 24 years to double the investment while the 3.5%
rate takes just over 20.5 years. The half point difference in CAGR reduces the
time to double by nearly 25%. That’s a nice reduction for waiting and watching as dividends slowly grow.
If a DGS grows its dividend at the average 10-year growth rate of the 138 Dividend Champions (as of January 2, 2020), the
CAGR over the same 10 year period grows to 4.32% and the time to double the
money shrinks to 16.7 years. The 1.32% rate advantage offered by DGS generates
a 30% reduction in the time to double an investment.
A wise Dividend Farmer harnesses the power of compound
interest and consistent dividend growth. Doing so would make Albert happy. Who wouldn’t want to please this guy?
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Thoughts
presented are those of the author, who is not a financial
professional. Perspectives are not investment advice, but offered for the
purpose of discussion and information. For specific investment advice or
assistance, please contact a registered investment advisor, licensed broker, or
other financial professional.
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