If you had bought one of these companies 10 years ago, you’d be earning a 15.3% dividend yield on your original investment.
It’s one of the most overlooked aspects of income investing. In fact, I’m willing to bet that the majority of income investors don’t even consider it when they’re buying a dividend stock.
That’s a shame because what I’m about to tell you could be the most important quality of a successful income investment.
That makes sense.
With interest rates near zero and traditional income investments like Treasury bonds yielding next to nothing, any stock that pays an above-average dividend yield is going to seem attractive.
But if you’re only looking at a stock’s current yield, then you could be missing out on some of the market’s greatest opportunities.
That’s because yield isn’t the only key to a good income investment… you also need to consider a company’s dividend growth.
Dividend growth can turn lower-yielding stocks into big income producers over time.
Don’t believe me? Consider this… Darden Restaurants (NYSE: DRI) — the popular restaurant operator that owns brands such as Olive Garden and The Red Lobster — is currently paying an annual dividend of $2.00 a share. At today’s closing price of $56.04, that means the stock is paying a 3.6% dividend.
In this market, a 3.6% yield isn’t bad… especially with the average yield on the S&P 500 hovering around 2%… but it’s not spectacular by any means. It probably wouldn’t garner a second look from most income investors.
But when you take the stock’s dividend growth into consideration, there’s clearly more to the story. In the past decade, Darden has increased its quarterly dividend from $0.04 per share back in 2002 to $0.50 per share today — a 1,150% increase in just 10 years.
If you had bought the stock a decade ago when it was trading around $18.00 per share, your yield on cost (the current dividend yield based on the original cost of your investment) would be 11.1% annually.
Now I know a 1,000% dividend increase might seem like a one-off occurrence. And to some extent it is… not many companies can afford a dividend hike of that magnitude. But as you’ll see in a moment, I’ve identified several other companies with quadruple-digit dividend growth.
The list below includes six other companies — all of which are members of the S&P 500 — that have boosted their payouts by over 1,000% in the past decade.
Ten years ago, income investors wouldn’t have given these stocks a second look. Their yields were too low to even be considered. But had you bought them a decade ago and held on to the shares, each of these companies would now offer an attractive yield on cost.
Buying stocks that increase dividends allows you to take advantage of the single most powerful tool in finance — compounding. Thanks to compounding, low-yielding stocks can turn into big income producers over the long-run.
However, it’s important to remember that these are unusual examples. Not every income stock is going to increase its dividend by 1,000% over the next 10 years.
But it just goes to show you that current dividend yields are really only part of the equation. Don’t dismiss a stock just because it pays a low yield right now. Otherwise you could miss out on one of the best income investments of the next decade.
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Source: Dividend Opportunities
Disclosure: Neither Paul Tracy nor StreetAuthority own shares of the securities mentioned in this article. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.