The strategy is straightforward. I'm building a portfolio of income stocks that pays me a dividend for every day of the month. And because I want to make those dividends grow as large as possible, I'm also reinvesting every cent of the payments.
It's a simple way to invest and many investors have heard about it before. But until now, most have only seen this sort of strategy backtested -- not put in place in real life.
The good news is that while we all know being paid dividends regularly -- and reinvesting those payments -- is "supposed" to work, the actual results have been much more exciting than even I expected.
For instance, I'm now averaging more than $1,357 per month in dividends and have earned more than $40,900 in total dividends.
But this strategy has also uncovered something surprising that could have a big effect on how you invest.
My portfolio holdings are separated into three different groups. Those securities in the high-yield opportunities are the highest yielders. These investments pay more than 10% on average. The fast dividend growers are those companies increasing their payments quickly. And the steady income generators are the holdings that can simply be counted on to pay stable dividends year after year, without much change.
What's surprising is which of these groups has performed the best. The fast dividend growers have the lowest average yield of the three. These holdings pay an average yield of 4.9%. But this group has an average total return of almost 50%. Compare that to an average total return of roughly 39% for all the portfolio holdings.
In other words, the fast dividend growers have returned more on average than the portfolio as a whole... despite paying yields lower than most of the other holdings.
Take Altria Group (NYSE: MO), one of the holdings in my fast dividend growers group. The stock pays a 5.3% yield -- solid, but not eye-popping. But since mid-2008, the company has raised the quarterly dividend from 29 cents per share to 44 cents. That's an increase of nearly 52% during the most turbulent economy in generations.
With that sort of stability, it shouldn't be a surprise the stock has returned more than 85% since I first added it to my Daily Paycheck portfolio in April 2010, compared to the S&P 500's roughly 34% return in the same period.
So what can you take away from this finding?
Action to Take --> First and foremost, it proves what you've always heard. Investing in dividend-paying securities -- especially those paying increasing dividends -- and reinvesting those dividends can be a very lucrative strategy, especially in a tricky market.
But more than that, it proves that often it isn't the highest-yielding dividend payers that give you the highest return. High yields are tempting, especially if you are after current income. However, more often than not those companies able to consistently increase their dividends turn out to be the better investments.