Dividend paying companies tend to increase their payouts roughly in proportion to their increasing earnings per share. Not all companies follow this guideline but many do. Generally, those that increase their dividend in line with their earnings are the better run companies – the ones you can count on. Growing dividends are not the only signal of quality; you still need to do your homework.
Dividends provide two opportunities; first, the opportunity to reinvest them in the same company or elsewhere; second, an income stream that increases over time and probably outpaces inflation.
Bonds, Treasury Bills, CD’s, and Money Markets will not provide an ever increasing income stream. $1,000 invested in 30 year Treasury’s at 3% interest will pay $30 per year the first year and in the thirtieth. But, $1,000 invested in, say, Proctor & Gambol currently yielding about 3% will pay $30 in the first year but could easily pay more than $200 in year thirty.
Of course, some disaster could take down Proctor & Gambol or the company could cut its dividend. It’s happened to many companies recently including nearly all of the financials. But spreading the risk among different investments reduces it. It cannot be eliminated no matter what you do with your money. Put it in your mattress or in Treasury Bills and watch inflation destroy its value. In 30 years, your $1,000 will probably be worth between $100 and $500 in today’s value. But your P&G (or other quality company) stock will likely be priced at more than $6,000 with current value purchasing power of between $600 and $3,000 or more.
Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts