The Loonie Bin: Dividend Investing 101: Dividend Growth

The Loonie Bin: Dividend Investing 101: Dividend Growth

Dividend Investing 101: Dividend Growth

In my last post I explained compound growth and how you can make more money from a smaller investment over a longer period of time. This next post covers dividend growth and how it's the heart and soul of a dividend investment strategy.

Everyone likes getting a pay raise. The satisfaction of being rewarded for your hard work and planning can be very exciting. Imagine getting thousands of little pay raises over years of investing and how it grows your dividend income exponentially. I remember a few days after buying BCE earlier this year and hearing they increased their dividend; it felt great getting a pay raise without doing any work. And now BCE has increased their dividend again. My yield on BCE increased 2% already this year, and I can't wait for my other stocks to do the same.

How do you know which companies to buy that increase their dividends on a regular basis? Well looking back at past dividend increases on company websites is your best bet. Other websites and blogs have made lists comprising of dividend paying companies that regularly increase their dividends over the last few years. I know the Canadian big banks haven't increased their dividends in a while, but there's a lot of speculation that they will early in 2011. I don't want speculation, I want them to show me the money! Once you find a company that you like and puts their money where their mouth is, you can feel a little more comfortable investing in them. Take Enbridge for example.

Enbridge has been paying a dividend for over 57 years and has a dividend growth average of 10% a year. To me, that seems pretty dependable and is why it's my favorite stock to own. I'll even use it in an example of what dividend growth can do to your investment.

If you were to buy 100 shares of Enbridge stock on the day of this post, you would pay $5235 and your dividend paid per year would be $170. Your yield on this investment would be (1.70/52.35) 3.24%. Not the best yield available out there, but what what happens when the dividend increases 10% a year:

Not a bad little investment. After 10 years of dividend growth it's paying you $440 a year. Try and find any mutual fund out there that pays a GUARANTEED 8.42% every year and keeps increasing! And to show you how it grows and compounds over time, here's the next 10 years:

With another 10 years of enjoying life and not even worrying about the stock market ups and downs, you would still be paid 21.85% on your initial investment. By now you investment would be paid for, plus it would have allowed you to purchase other stocks which have also increased their dividends over these last 20 years. Imagine the possibilities of what your portfolio could look like. Just think if you started early enough to get 30+ years of dividend growth, your returns would be insane!

Now not every dividend paying company increases their dividend by 10% every year. But even if it's only 6% its still keeping ahead of inflation and allowing your buying power to be maintained in the future. Having a comfortable retirement is what everyone wants, but most people think it's a lot of work to plan and maintain your own investments. This single investment took 1 min of time to complete with a discount TFSA trading account because there's no taxes involved and there's no upkeep whatsoever as long as you invest in solid, blue chip companies. If anything you would only sell a company if it cut it's dividend, like Manulife, which was all over the news unless you live under a rock.

I read the headlines at The Globe and Mail investor section and it keeps me up to date each day. If spending 5 minutes a day, exercising your brain is to much work, then you might as well stick to mutual funds and pay monkeys to invest for you.