Building Wealth

'Dividend Boost' Can Turn a 5% Yield Into 34.2%

When I look for great companies to invest in... One simple metric tells me more than any other.

This one metric tells me how popular a company's products or services are... how well it runs its business, and perhaps most important... how well it will protect and grow my investment.

The best part is, using this metric doesn't require you to master some abstract valuation formula or comb through boring, confusing financial reports. You simply log onto Yahoo Finance and check one stat:

Dividend yield.

A solid dividend is often a sign of a great company.

Companies with long histories of dividend payments top my list of potential investments. You can't use accounting schemes to fake a dividend for very long... (Longtime Retirement Millionaire subscribers are familiar with my saying, "dividends don't lie.")

More important for long-term investors, the key to safely building your wealth is to create a safe and growing stream of investment income.

And the best way to do that is to invest in a set of American businesses that have reliably distributed income to investors for many decades.

An investment that's generating cash and returning some of that cash to shareholders (in the form of a dividend) is what I call "shareholder-friendly."

There is a simple but powerful tool to boost the yield that you receive from any dividend-paying investment...

It can mean getting an extra $15, $50, or even $500 each month from your investments... All without doing much, if any, extra work.

It's incredibly simple. When a company mails you a dividend check... instead of spending it, using it to buy a new lawnmower, or taking your spouse out to dinner... buy more shares of the company's stock.

That's it.

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As simple as that sounds, it's an incredibly powerful tool when you put it to work. Let me show you just how powerful...

Let's say you find a stock you like that pays a safe, rich 5% yield. (We'll use round numbers to keep the math in this example simple.)

Here are the steps you'd take...

Buy 100 shares for $10 each. We'll assume the share price and the dividend stay fixed at $10 and 5%, respectively.

  • At the end of the first year, you'll receive $50 in dividends (5%).
  • Take that payment and buy five more shares... This increases your position to 105 shares.
  • In Year 2, you earn $52.50 in dividends. You reinvest this, too, adding another 5.25 shares to your position.
  • You now own 110.25 shares.

Repeat this process for 12 years and in the 12th year, you'll make $85.52 in dividends. That's an 8.55% dividend yield off your initial $1,000 investment.

This is what accountants call "compound" investing. Your dividends turn into stock. This extra stock then produces dividends of its own. That dividend becomes stock, and so on...

Even better, most online brokerages today make it easy to automatically reinvest your dividends. Charles Schwab, E*Trade, Fidelity, OptionsXpress, Capital One Investing, TD Ameritrade, and TradeKing each allow you to reinvest your dividends on most stocks for free.

This is especially powerful in tax-advantaged accounts, like a 401(k) or an IRA. In regular brokerage accounts, each reinvestment has its own tax consequences and a new cost basis. Call your broker if you have questions.

Ultimately, making the decision to automatically reinvest your dividends is incredibly simple... And compounding interest or dividends is one of the strongest ways to build wealth in finance. Warren Buffett built his fortune by compounding dividends.

We're not finished yet... The real magic in compounding happens when you pick stocks that pay larger dividends each year.

Imagine a dividend that grows 10% each year. Your position compounds at twice the speed. The 5% dividend yield turns into a 34.2% "yield on cost" (as it's called) in the 12th year.

Of course, the big question is: Which dividend-paying stocks are the right ones? Which high-quality companies will still be around... paying dividends quarter after quarter?

Identifying those companies is the first step in our "Dividend Boost" program. And paid-up Retirement Millionaire subscribers can read our full report here.

(If you're not yet a Retirement Millionaire subscriber, click here to learn how to join.)

Have You Read This Yet?

Dividend investing is low-risk... and produces huge returns. It will allow your investment portfolio to withstand any crisis (just like it did during the financial crisis of 2008).

In Dividend Millionaire, my friend and colleague Brian Hunt details how this strategy works and why it's one of the ultimate ways to build wealth in the stock market. Rather than worry about money and security in your golden years, you can use this strategy to live an income-rich retirement.

  • Chapter seven focuses on how to harness the power of compounding.
  • Chapter four gives you a handy "shortcut" on finding the world's best businesses.
  • And chapter nine details how elite, dividend-paying businesses are the ultimate "wealth defense."

If you don't already have a physical copy, you can get yours here, shipped to your door, for $13.

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