Whenever I talk to someone about the virtues of investing in dividend paying stocks for the long haul, I always have to give a concrete example of how the power of compounded dividends (no matter how small) will add up to solid wealth over time. Phillip Morris and Pepsi are two classic examples of how top dividend paying stocks can build a solid cash flow over time. Here are some others just to prove this point:
Johnson & Johnson (JNJ) – one of my favorite dividend payers and a great one to buy right now. 100 shares of JNJ 20 years ago would’ve cost about $6,750. By reinvesting those dividends back into the stock, you’d have over 1200 shares today worth over $68,000 (10x your original investment) and paying over $2,500 in dividends a year – almost 40% yield on your original investment.
Consider the following example. Pepsi stock currently trades for about $70 and pays a dividend of $2.06 for a yield of 2.9% Now, that may not seem like much now…but let’s take a look at Pepsi’s stock back in 1980. Back in March of 1980, Pepsi traded for about $24 but that doesn’t mean that it took 30 years for Pepsi’s stock price to double…it grew at a much greater rate than that – if we look at the March 1980 share price adjusted for dividends and stock splits, then Pepsi’s stock traded at $0.59 and paid a dividend of $0.01583 for a yield of about 2.7% (not much different from today). But look at what happened over the last 3 decades: Pepsi’s stock went from $0.59 to $70! And the dividend grew from one and a half pennies each year to over $2 today!
With Phillip Morris, your $2,000 back in 1980 would’ve grown to over $670,000 today and would be paying over $9,600 a year in dividends. That’s the power of investing in top dividend paying stocks over time.
There are hundreds of examples like this and most of them are well known companies that were well known back in 1980…that would’ve been likely candidates for dividend increases over time back then. The key to this spectacular accumulation of wealth is the power of compounding dividends. In both of these examples, the reinvested dividends account for well over half of the wealth created and thanks to the power of compounding, a portfolio of top dividend paying stocks (even with just a 3% yield) will actually pay significantly more on an annualized basis time even if stock prices stay absolutely flat.