How a Dividend Stock Could Be Your Wisest Investment

 |  Includes: GOV, T
by: StreetAuthority

by Amy Calistri

I have a small change to make to your investing for 2011. I'd like for you to put money in the best investment you'll ever make. It may not sound like a small task, but don't worry. It will be easy.

All it takes to start is $1,000. I selected this amount because it's a nice round number to start from and if you're an investor, you can usually come up with that much without too much trouble or sacrifice. If you'd like to invest more, that's no problem. It will simply amplify your results.

If you're risk-averse, that's great. This investment is one of the safest you can make. And remember, if you're skeptical or simply don't like how the $1,000 investment is going, you can always stop. Let's be honest -- no one cares more about your money than you do. If you aren't comfortable, don't continue.

With your $1,000, I want you to find one investment that pays anywhere from 6-10% in dividends each year. It is best if the stock pays monthly, but quarterly is fine.

It doesn't really matter if the investment is a stock, a fund or even a master limited partnership. What's most important is that the investment be relatively stable, but -- and I can't emphasize this enough -- the dividends have to be secure.

High-yielding blue-chip stocks such as AT&T (NYSE: T) are a good choice for this test. AT&T pays a shade below 6%, but that's OK. Real estate investment trusts like Government Properties Income Trust (NYSE: GOV) would also work well. The higher the yield, the better the results of your test should be, but anything in the 6-10% range should be fine.

Once you have your investment picked out, you know where to put all of your $1,000. But there are two more small steps to take.

First, you have to reinvest your dividends. Usually all this takes is a call to your broker or selecting the option in your online account. Second, you should add $1,000 to your initial investment once a year.

I told you it was easy. But if you can follow this simple strategy, it might end up being the best investment you ever make.

Say your $1,000 is bringing in 8% a year in dividends and the price rises a pedestrian 4% a year. At the end of your first year, your $1,000 would be worth about $1,120 for a return of 12%.

That's not bad, but as time passes the results of the test prove how valuable the strategy is. Take a look at the chart below.

At five years you will have put up just $5,000, but your investment would be worth $6,393. That's a 28% gain. For reference, the S&P 500 is up 2% over the last five years.

In 10 years, you'll be sitting on a 78% gain... and an investment worth $17,823. Your 8% yield would also be worth more than $1,400 a year. In 15 years you'd have more than $27,000 in your investment.

Is this a way to get rich quick? Sorry, if that's what you want, then stick to all-or-nothing growth stocks. (How well has that worked out for investors in the past decade?) Is it a way to get rich slowly? Absolutely.

With the start of a new year, making smart financial choices is near top of many people's resolution list. You can make it easy on yourself, starting with just $1,000 and most likely turning it into the best investment you'll ever make.

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Disclosure: Neither Amy Calistri nor StreetAuthority, LLC hold positions in any securities mentioned in this article.