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A 24.9% Yield That Grows Every Year

 March 06, 2013 11:25 PM
 


When I first heard this, I thought it sounded impossible. 

But in just a few short years, some individual investors could start earning more than 20% -- 24.92% to be exact -- on their money, every year.

That adds up to $2,492 a year for just a $10,000 investment -- 30 times more than what a bank certificate of deposits pays today.

And almost anyone can start collecting giant yields like this every year -- all from a single stock purchase.

To be sure, there are dozens of stocks that could deliver equally high yields for investors. I'd be willing to bet that you've already invested in some of these companies. 

But before we talk about companies that can give you giant yields like these, I need to tell you one thing about this investment opportunity. 

[Related -Colgate-Palmolive (CL) Dividend Stock Analysis]

And many investors won't like it. In fact, some may hate it... 

As with any great goal, this one will take time to reach. 

Try to think of a great achievement that only took a few weeks or months to accomplish -- they are few and far between. It took decades to put a man on the moon. It took decades to develop a vaccine for polio. It took four years to construct the Golden Gate Bridge... and five years to build the Hoover Dam.

These accomplishments weren't done in a few weeks or a few months. The biggest goals -- the ones that can truly change the path of your life -- take years, if not decades, to accomplish.

It's the same in investing. 

Although it won't happen overnight, you can generate significant returns in a few years by following one simple rule:

[Related -Intel Corporation (INTC): An 18.1% Yield From Intel?]

Invest in companies that consistently raise dividends, then have the patience to let them pay you for years to come.

I'll show you how...

You see, I won't touch a stock unless it pays a dividend. But I don't chase after risky high-yield stocks. Instead, I'm MUCH more interested in a company's dividend growth than I am in its current yield.

Dividend growth isn't talked about much. You won't find CNBC or Bloomberg teaching investors about its importance. They are too caught up in the market's day-to-day movements to explain something like this. But the returns dividend growth can help you generate are staggering.

Consider McDonald's (NYSE: MCD). It's a steady dividend grower and the perfect example of what dividend growth can do for you and your wealth.

Back in early 2008, McDonald's traded for about $50 per share and paid a quarterly dividend of 38 cents per share.

So if you invested $10,000 five years ago, then you'd own 200 shares ($10,000/$50) of McDonald's. During the first year, you would've generated a little more than $300 in dividends (or 3%).

That's an admittedly modest sum. But look at what happens when McDonald's sticks to its tradition of relentlessly raising its dividend. 

Since early 2008, McDonald's has increased its dividend an average of 15% a year. Today, the quarterly dividend stands at 77 cents a share. Those 200 shares now earn $616 in dividends annually -- more than twice as much as five years ago.

That means anyone who has held McDonald's for five years is now earning a 6% yield on their investment.

That's just the start. Although there are no guarantees, I believe McDonald's will continue raising its dividend. And going forward, that will make some investors an unbelievable amount of money.

If you're not convinced McDonald's will continue to boost its dividend, then let its history tell the story. As a Dividend Aristocrat, the company with the golden arches has raised its dividend payment for 36 consecutive years (and counting).

If McDonald's continues to grow its dividend by 15% annually, then that original $10,000 will earn $1,240 a year -- equivalent to a yield of more than12% a year -- in just five more years.

And just five years after that, the $10,000 investment would earn $2,492 a year in dividends -- almost a 25% yield on the original investment each and every year. And that figure will continue to grow as long as McDonald's keeps increasing its dividends.

And these returns are from dividends alone. They assume zero dividend reinvestment.

And none of this even mentions any capital gains that come with companies that raise dividends. For instance, McDonald's shares have gained 92% -- 125% if you include dividends -- in the past five years.

And what if you've owned McDonald's for longer? Let's say you invested that $10,000 in McDonald's a decade ago, when it was about $10 a share, then you would be earning $3,080 per year by now in dividends alone -- a 30% yield on your money. Add in capital gains and you'd be sitting on a total return of 1,152%.

Remember, that was just $10,000. Just imagine the size of the yields you could have in just a few years by investing a few thousand more into McDonald's and letting it grow for even longer periods of time. 

The strategy is simple. Buy dominant companies like McDonald's, hold onto them for the long haul, and let dividend growth do all the work for you.

Action to Take --> But remember, there's no sense in putting all of your eggs in one basket. Instead, the best way to do it is to buy a basket of these of dividend growers trading at a great value -- and a great place to start is by looking at these companies...

 

-- Paul Tracy

P.S. -- In a recent special presentation -- Top 10 Stocks for 2013 -- I've uncovered several more investments that are similar to McDonald's -- ones that dominate their markets, pay increasing dividends, and repurchase billions in stock. To learn more about these ideas, including several names and ticker symbols, visit this link.

Paul Tracy owns shares of INTC, CSCO.StreetAuthority LLC owns shares of INTC, CSCO in one or more of its "real money" portfolios.
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