Monday, March 21, 2005
I know all about the worries of our day--rising interest rates, inflation, falling dollar, balance of trade, deficits, and a stock market that can't seem to find its legs. But in the midst of the wall of worry, I think there is a simpler, better, and more meaningful message that investors should hear. Dividends are on the rise and dividends matter. I spend a lot of time making educated guesses about the future. For a change, I thought I would take a 20/20 look back. For the sake of discussion let's say ten years ago Wells Fargo, traded at $14 and paid a $.45 dividend, for a 3.2% dividend yield. Let's think the worst and assume that the wall of worry that was present in 1995 (the wall is always with us) was correct and WFC's stock price did not move a penny over the next 10 years. During this time, however, its dividend grew to $1.87, a 15.3% compounded annual rate. While the dividend growth is impressive, the rate of return for the period will still have to take into consideration that the price of the stock did not increase at all. In this hypothetical case, the annual internal rate of return for the period would have been 7.05%. That is acceptable, but not up to the 10%+ historic returns of the major stock averages. But consider for a moment the odds of WFC actually increasing their dividend over 15% per annum for a decade and the price NOT going up. It is impossible, because if it did it would be yielding over 13% on the original investment ($14/$1.87). Rising Dividend Investing is such a powerful idea because, dividends are vastly more predictable than stock prices. Yet, a consistently rising dividend will ultimately do what worry, wishes, and pipedreams can not--it will produce solid total rates of return and permit you to turn off CNBC and have a good night's sleep. Too many people are thrashing about in the dangerous waters of trading the news, when they could be sitting on a bank, literally.