Dividend reinvesting is a time-honored method of building
wealth. Even whenmarket gains slow down, dividendsoffer regular and
dependable income that, when reinvested, quickly ramp up the value
of your portfolio.
Dividend reinvestment even makes sense in a falling market.
There is an inverse relationship between dividend yields and stock
prices. This means when stock prices decrease, dividend yields
increase. Reinvesting the increasedyield back into lower-priced
stocks creates an automaticcompounding effect that can dramatically
increase yourbottom line over time.
Believe it or not, since 1920, dividends have accounted for 40%
of the gains booked in the S&P 500. Investors who don't
participate in dividend reinvestment miss out on a huge part of the
stock market's gains over time.
When it comes to a successful dividend reinvestment strategy,
there are three key aspects you should consider.
1. Don't touch your principle
Your principle or nest egg is the must-have tool to earn dividend
income for reinvestment. Decreasing your principle by sellingshares
will noticeably increase the time needed to reach your financial
goals. Even during times of dropping stock prices, when it will be
tempting to get rid of a stock, time has proven this isn't a wise
move.
2. Keep your costs low
The lower your investing costs, the higher your potential profits.
In the volatile world of stock investing, costs are the one thing
completely under your control. Think of dividend reinvesting as a
business, so try to keep your business costs low. Find out what
yourbroker charges and shop around for the best price.
3. Only invest in companies that historically increase
dividends
This is perhaps the most important aspect in successful dividend
investing. Not only are companies that regularly increase dividends
generally more stable, but increasing dividends is the assurance
that your dividend income retains its purchasing power over
time.
My colleague Carla Pasternak, the face behind
High-Yield Investing
, teaches these same concepts. Carla likes to find reliable stocks
that regularly increase dividends. She calls these
Retirement Savings Stocks
is now.
Many investors are concerned about the potential dividend tax
increase slated to take place on Jan. 1, 2013. It's still uncertain
whether a solution to the country's fiscal problems will be reached
by the end of the year, when the automatic tax increases will be
enacted. But investors should keep in mind that history has shown
that previous changes to the dividendtax rate only have a
short-term effect on dividend stocks. Generally, within six months
of the tax change, dividend stocks return to their normal
valuations. If the worst-case scenario happens and dividendtaxes
increase, then dividend-paying stocks will likely still offer
superior returns and provide those who live off theirinvestment
income with a wiser choice than selling shares and being hit with
capital-gain taxes.
And there are many great
Retirement Savings Stocks
that regularly increase dividends. Here are three of my
favorite stocks right now...
1. Aflac Inc. (
AFL
)
Well known for its TV commercials featuring a duck, Aflac is a
supplemental insurance company that pays adividend yield of 3%. It
has increased its dividends consistently during the past 30 years.
Although the dividend has risen by only about 6% in 2012, it has
increased by an average of 11% during the past five years. The
company's earnings-per-share (EPS ) is forecast to improve 11% each
of the next five years. Based on these metrics, it's extremely
likely Aflac's history of dividend increases will continue.
2. Abbott Laboratories (
ABT
)
Boasting amarket capitalization of nearly $100 billion, this
pharmaceutical kingpin is a leader in its field. During the past
five years, the company has increased dividends at an average
annual rate of roughly 9.5%. EPS is forecast to grow about 8.5% per
year and will likely allow the dividend increases to continue. It
currently pays a dividend yield of 3% on apayout ratio of
50%.
As a point of interest, the company is about to split into a
medical products business named AbbVie, while Abbott will continue
to focus on medical devices, nutritional products and diagnostics.
This split will likely be very positive for the stock price. I
focused on the benefits of these types of corporate actions
in this article
.
3. Eaton Corp. (
ETN
)
This aerospace, power management and hydraulic components maker
grew its EPS by an average of 6% per year during the past five
years. The growth is projected to continue at a 9% rate for the
next five years. Dividends increased at an average rate of 12%
during this same time frame. Currently, its dividend yields roughly
3%. The historic and projected EPS growth paints a powerful case
for continued dividend increases.
Risks to Consider:
It's important to remember that nothing is ever for certain in
the stock market. Long-time dividend-yielding stocks that appear
solid can suddenly stop paying or even suffer steep declines.
Always use stops and be sure to position size properly when
investing.
Action to Take -->
The three stocks listed above are strong contenders for
everyone's dividend reinvestment portfolio. And while I won't
presume to speak for Carla, I think they fit the bill for
Retirement Savings Stocks
pretty well. Their proven record of dividend increases and
unyielding performance metrics creates a compelling case for each
of the companies.