Seeking Alpha
Long only
Profile| Send Message|
( followers)

Compound dividend investing has a phenomenal effect over time. It is extremely difficult to realize these extraordinary gains, since the great effects are usually seen towards the end of the process. This means having supreme patience and requiring a tremendous amount of discipline. Let's be honest, most of us are looking for the homerun stock to tell about during the next holiday dinner. This strategy works like magic and for the younger investors who have plenty of time, there are huge gains to be made if done correctly.

The companies that will have the most beneficial impact with this compound dividend strategy are the ones that have a history of high dividend growth and a healthy current dividend yield. By high dividend growth, we are referring to companies that have increased their dividends on average by over 4 percent per year. Also important is the history of increased dividends. It is imperative to search for the companies that have managed to pay dividends at a consistent pace for numerous years without much fluctuation. Management prides itself in this consistency and does everything to maintain its status of dividend increases.

There are 3 companies in particular that fit these criteria extremely well. First let's take a look at Johnson & Johnson (NYSE:JNJ). This healthcare developer, manufacturer, and seller has been increasing dividends for over 25 years at an over 5 percent pace. In each scenario, it is reasonable to assume a 5 percent average annual dividend growth rate as well as a conservative 5 percent increase in share price. We will take a long-term view and look at the affects over a 40-year time horizon that younger investors can fully take advantage of.

Dividend Reinvestment Calculator

Initial Number of Shares:

235

Initial Price per Share:

$ 85.70

Annual Dividend:

$ 2.64

Dividend Annual Growth Rate:

5 %

Stock Price Annual Growth Rate:

5 %

Number of Years:

40

Calculator Results

Without Dividend Reinvestment

With Dividend Reinvestment

Total Value

$220,473

$477,181

Number Shares

235

791

Dividends Paid

$78,691

$179,526

Annualized Return

6.17%

8.23%

McDonald's (NYSE:MCD) has increased its dividends for over 25 years as well at a pace of over 4 percent.

Dividend Reinvestment Calculator

Initial Number of Shares:

215

Initial Price per Share:

$ 93.39

Annual Dividend:

$ 3.24

Dividend Annual Growth Rate:

5 %

Stock Price Annual Growth Rate:

5 %

Number of Years:

40

Calculator Results

Without Dividend Reinvestment

With Dividend Reinvestment

Total Value

$229,711

$553,063

Number Shares

215

841

Dividends Paid

$88,356

$224,663

Annualized Return

6.28 %

8.64 %

Coca-Cola (NYSE:KO) has been increasing its dividends for over 25 years with a current yield of over 3 percent.

Dividend Reinvestment Calculator

Initial Number of Shares:

540

Initial Price per Share:

$ 37.08

Annual Dividend:

$ 1.12

Dividend Annual Growth Rate:

5 %

Stock Price Annual Growth Rate:

5 %

Number of Years:

40

Calculator Results

Without Dividend Reinvestment

With Dividend Reinvestment

Total Value

$217,665

$463,501

Number Shares

540

1775

Dividends Paid

$76,712

$172,122

Annualized Return

6.15 %

8.17 %

With an approximate $20,000 investment in each case, we end up with making more than 20 times our initial investment. The increasing dividend income yield with simply reinvesting reveals the magic of dividend reinvestment. In all scenarios, we end up with owning more than triple the shares by reinvesting our dividends.

For the investor with time and diligence, this approach is the road to a secure retirement with a steadily increasing dividend income. The earlier we start, the better off we will be. Time is the most quintessential component in compound dividend investing. Although we will start off receiving what seems like measly dividends, the end results are astonishing. In bear markets, we should view these as unique buying opportunities that will give us an even better yield. Hence, as our dividends come in, we can buy at discounts. This strategy is geared towards a long-term horizon and getting "rich" slowly.

Disclosure: I am long MCD, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Take Advantage Now Of Compound Dividend Reinvesting Before It's Too Late