The power of dividend investing
A dividend is simply money that companies will pay to their stockholders. It’s their way of saying “We’re offering you a piece of our profits in cash because you are a valued shareholder.” It’s one of the simplest ways for ordinary people to make some extra income. All investors have to do is wait for the steady dividends to roll in periodically; it’s as easy as earning interest.
The best way I’ve found to make money using dividend income is to buy and hold stocks that have dividend yields over 2%, and increase their dividends periodically.
For example in 2011 I purchased 25 shares of TD Bank at $75 each, for a total investment of $1,875. Well since then I have received $920 in dividends from my shares without investing any more money into this stock. That’s nearly 50% return on investment from just dividend income alone.
Since TD has a long history of raising dividends every year, over time I will have made all my initial investment back in dividend income. Dividends are paid using after-tax earnings of corporations. So a trend of rising dividends is a healthy indicator that a company is making more and more money, which of course should also lead to a higher stock price. The value of those TD shares I bought are now worth $3,650 which is up from $1,875 back in 2011.
This year my TD shares will generate $150 in dividends, an impressive 8% return on my initial investment amount. Where else can you find a safe, reliable, and steady return of 8%, plus have the potential for additional capital appreciation? And chances are the dividends will rise even higher in the future as TD has been steadily increasing dividend payments for over 50 years. The total return (stock price appreciation + dividend income) of my investment in TD Bank so far is about 11% annualized. Other dividend growers in my portfolio have performed similarly. It’s easy to see how the longer I stay invested in a dividend stock, the greater the rewards will become.
This powerful strategy of buying dividend growth stocks and holding them for the increasing dividend payments has been successfully used by investors for decades. It does require time and patience, but the payoff is immense.
My Dividend Investing Journey
When I got my first job I wanted to start investing early and take advantage of compounding. I started with dividend investing because it seemed to be the best way for investors to grow their wealth over time. The way I got started in 2009 was by opening up an account with a discount brokerage firm. One of my first stock purchases was Rogers Communications (RCI.B.) I bought 30 shares for $30 each. I was receiving $35/year in dividends for simply being a part owner in the business. 🙂 In 2020 not only has the share price of RCI.B doubled, but my dividend payments have also gone up to $60/year. You’ve probably noticed that phone and cable companies are charging more for their services every year. All that extra money they’re earning has to go somewhere right? Well a part of it goes to the shareholders. As corporate profits rise, so do dividend payments. 😉
From 2009 to 2011 I was heavily focused on buying dividend stocks with high yields like 5% or 6%. But starting from 2012 I changed my strategy and began to invest in dividend growth stocks instead, which are dividend paying companies that may not necessarily have very high dividend yields, but do have a long history of increasing their dividend payments, often every year. The best dividend growth stocks are sometimes called Dividend Aristocrats. I plan to keep buying these dividend growth stocks and hold them into my retirement. 🙂 I also use DRIP to buy additional shares at discounted prices.
Buying dividend stocks is easy to understand. But choosing the right companies to buy requires a little bit of research. You can browse through my articles in the stocks category for ideas, or view my portfolios to see which stocks I like to invest in, but be sure to do your own research too.