The best method to generate wealth in the stock market is to compound your money over long periods of time. One way to accomplish this objective is to buy stocks that continue to grow their dividends each year to compound the dividend yield on cost. Over time, the yield on cost will grow each time the stock increases its dividend. For example, you may buy a stock yielding 2% today, but in 10 years following annual dividend increases its yield on cost may be 10%. This is the way to super-compound dividends over time.
Richard Russell is the greatest living financial writer. He is almost 90 years old now and has been writing about finance longer than most of the people reading this message have been alive. Here's what he says about the importance of "compounding" your income…
Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it.
To compound successfully, you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.
In a period of great financial uncertainty, dividends offer investors both shelter from the storm and solid total returns. But as Russell points out, this approach only works if you're rigorous, disciplined, and patient.
Compounding can be accomplished in two ways. One, the investor can reinvest their dividends by purchasing more shares of a stock to increase the amount of income over time. Two, investors can select stocks that increase their dividends each year to compound yields internally. This method is displayed as the yield on cost in future years. Here is a list of stocks that may super-compound your dividends into high yields on cost in future years.
Altria Group (NYSE:MO) engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Altria has a current dividend yield of 5.4%, which may provide a future yield on cost of 11.7% in 10 years (see table below). On 3/1/12, Altria announced a regular quarterly cash dividend of $0.41 per share, payable on 4/10/12 to shareholders, with an ex-dividend date of 3/13/12.
Alliance Holdings GP, L.P. (NASDAQ:AHGP) produces and markets coal primarily to utilities and industrial users in the United States. It produces a range of steam coal with varying sulfur and heat contents. A coal stock is not generally seen as a dividend grower but Alliance Holdings has a strong history of upping its dividend. Alliance Holdings has increased its dividend for 15 straight quarters. In Q2 2008, Alliance Holdings paid a quarterly dividend of $0.2875 that is now $0.6375 in Q1 2012. Alliance Holdings has a current yield of 5.1% which may provide a future yield on cost of 13.2% in 10 years
Hasbro, Inc. (NASDAQ:HAS) engages in the provision of children's and family leisure time products and services worldwide. Hasbro has a current dividend yield of 4.1% which may provide a future yield on cost of 10.5% in 10 years. Hasbro dividends are paid on a quarterly basis. Last announced dividend was on 02/02/12 for $0.36 with an ex-dividend date of 4/27/2012.
CVS Caremark Corporation (NYSE:CVS) provides pharmacy health care services in the United States. CVS has a current dividend yield of 1.4% which may provide a future yield on cost of 8.9% in 10 years. CVS dividends are paid on a quarterly basis. Last dividend ex-date was on 1/19/2012 for $0.1625, a 30% increase from Q4 2011.
AmerisourceBergen Corporation (NYSE:ABC), a pharmaceutical services company, provides drug distribution and related services to healthcare providers and pharmaceutical manufacturers primarily in the United States and Canada. Since taking over in July 2011, Steven Collis has announced $815M worth of acquisitions (4 deals) as AmerisourceBergen will grow earnings through M&A in future years. AmerisourceBergen has a current dividend yield of 1.4% which may provide a future yield on cost of 8.9% in 10 years. Last announced dividend was on 02/03/12 for $0.13.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.