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Monday, September 30, 2013 - 11:30

How to Earn 13.0% Yields From Stocks Paying 6.2%

Monday, September 30, 2013 11:30 AM

The story was picked up by the major news sources a few years ago as a "cute" human interest feature. You might have seen the headlines like "How a Secretary Made and Gave Away $7 Million."

But for me, this wasn't some light news piece. This was a story that resonated deeply with me.

I didn't know Grace Groner, from Lake Forest, Ill. From the stories, she was a woman who lived frugally. Her passing was of interest because her three shares of Abbott Laboratories (NYSE: ABT) grew into more than 100,000 shares through decades of dividend reinvestment. In total, her estate became worth roughly $7 million.

And while I didn't know Grace Groner, I did know Lillian Calistri.

The last time I saw Aunt Lillian was in 1990. I remember that a nephew had the misfortune of addressing her as "Lillian." She promptly looked us all in the eye and said, "You will continue to call me Aunt Lillian." We were all over 25 years old at the time, but in Lillian's world, adulthood was no excuse for bad manners.

Aunt Lillian taught home economics at Charleroi High School in Pennsylvania. After she retired in the 1950s, she moved to Tucson, Arizona. I remember thinking it was nice that Lillian had been able to live comfortably in her golden years -- aided by a teacher's retirement and a nest egg from the 1952 sale of the family's ice cream business.

Here's the kicker. When Lillian died in 1993, her estate was worth north of $5 million.

Her broker was the only one who wasn't shocked. "They should have that kind of discipline on Wall Street," he said. Dividend reinvestment? You bet.

But there's something else to this story. And it's something that can help you earn larger dividends soon -- helpful if you don't have a lifetime to invest as Aunt Lillian and Grace did.

They may not have realized it at the time, but the women in these stories chose their investments wisely.

Abbott Laboratories, the company Grace Groner invested in, has paid more than 350 consecutive dividends since 1924. If you go back to 1983, adjusted for stock splits, the pharmaceutical paid a yield of just 1.1%. But since Abbott consistently grew its dividend since then, its latest dividend was $0.56 per share -- 3,485% more than its first payout.

One of Aunt Lillian's investments was International Business Machines (NYSE: IBM). IBM dished out its first dividend in 1962. Since then, the company has grown its dividend by 94,900%.

Neither Abbott nor IBM had a particularly juicy yield at the time these women bought their shares. But they had something equally powerful: a corporate culture dedicated to dividend growth. Throughout Grace and Lillian's lifetime, these companies never cut their dividend. In good economic times and challenging times, these companies found a way to deliver ever-increasing income to their shareholders.

And those extra dividends add up a lot quicker than you'd think.

In my Daily Paycheck portfolio, I have two classic dividend payers that I put in the same class as Abbott and IBM -- AT&T (NYSE: T) and Altria (NYSE: MO).

If you put $5,000 into AT&T five years ago, you'd have earned a 5.5% yield at the time. That's $275 per year. But today, that $5,000 investment would be paying $417 a year if you simply reinvested your dividends. That's an 8.3% yield on your original investment.

Altria is an even better story. Right now, the shares pay a solid 5.4%. It's nothing to sneeze at, but thanks to the company's commitment to dividend growth, $5,000 invested just five years ago -- plus reinvested dividends -- is now earning 13.2%, or about $660 every year. That makes for a 144% higher yield in just 5 years.

Action to Take --> It's doubtful most of us will have decades and decades to invest like Grace Groner or my Aunt Lillian. But that doesn't mean we can't see our dividends grow enormously in a span of just a few short years by simply choosing our dividend payers wisely and then reinvesting the payouts.

Note: Like I said, we don't all have decades to reinvest our dividends to see our stocks dish out high yields, and we all know high-yielding stocks are hard to come by in this market. But did you know there ARE stocks out there that are paying double-digit yields right now? You just have to know where to find them. In fact, there's a select group of what I call "Hidden High-Yielders" out there that yield up to 11.3%, yet the mainstream financial media is reporting that they yield as low as 1.5%.

I've already alerted readers of my premium newsletter, The Daily Paycheck, to this "glitch," -- and I don't think the secret will last for long. I urge you to check out our brand-new report on these "Hidden High-Yielders" before everyone else finds out about them.

Amy Calistri does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of MO, T in one or more of its “real money” portfolios.