An investor’s dream is to receive a 20% cash return on his or her investment. For example, invest $1,000 and receive a cash payment of $200 per year, forevermore. Wouldn’t that be great?
There is a way to do it, with relatively safe stocks, however, there are two requirements. First, you need a stable company with a long history of paying dividends. This company, however, must also have a history of increasing their dividend every year. This requirement will whittle down thousands of potential stocks to only a few dozen very solid companies.
Once you purchase a stock that meets this first qualification, you are going to be receiving dividend payments in your brokerage account. Most brokers have a feature that permits, “Automatic Reinvestment of Dividends.” By making this election on your stock, then your dividend payment will be used to purchase more shares of that stock. By doing this, you are adding to your position and therefore increasing your dividend payments each pay period.
Now, let me explain how you move from a normal 3-5% dividend to earning 20% with your dividends. In today’s economic environment, stock candidates that have a long history of increasing their dividends typically yield around 3-5% from dividends. However, you are employing two drivers to compound your cash dividend payments:
- Reinvesting all of the dividend payments to purchase more shares.
- The company will continue to increase their dividend payments each year.
If a company you selected never increased their dividend, then it would likely take 15 years for your cash payments to double, and then another 15 years to double again. So your 5% return would increase to 20%, but it would take a long time, roughly 30 years. But when your stock continually increases their dividend, depending upon how fast they increase it, it can reduce the time period to surpass 20% in cash dividend payments to less than 18 years. And if there are some larger increases, it can be less than 10 years.
Other dividend candidates include companies that routinely increase their dividend more than once a year or those companies that routinely make an extra dividend payment each year (note that these do not show up in the stock’s normal yield calculation because these are extra, non-regular dividends).
A more advanced strategy is to turn off your “dividend reinvestment” election, and instead sell puts on shares you want to purchase. This is a strategy called writing naked options and can boost your brokerage account with options income, while you wait to have shares ‘put’ to you that you wanted to buy anyway.
This is a very brief introduction for tactics to utilize dividend-paying stocks to ratchet up your cash income by thinking in a longer time-frame. While other investors might ignore a 2.5% yield on a stock, you may employ these tactics to create a substantial 20% yield much sooner than you’d expect.