A Surprising Dividend Play That May Make You Rich
The acquisition of wealth is paramount to our financial futures. Most Americans have historically depended on home ownership for accumulation of wealth, the recent crisis notwithstanding. But most people don’t realize that there’s a better way.
One of the greatest ways to compound wealth is to buy dividend-paying stocks and reinvest the dividends. Each quarter (some stocks even pay monthly), your dividends buy more shares, adding to the total on which your next dividend payment is calculated. But investing in dividend-paying stocks that consistently raise dividends puts the compounding effect on steroids.
Johnson & Johnson (NYSE: JNJ) has increased its dividends for the past 48 straight years, at an average rate of about 13.4% per year since 2000. If you purchased 200 shares of JNJ in 1980 (an investment of $14,600) and never added new money but just reinvested all the dividends, the position would be worth $1.15 million today. That’s a 7,868% return. In other words, it’s like buying a house in 1980 for $146,000 that today is worth about $11.5 million. Home values didn’t appreciate anywhere near that much. That’s the power of growing dividends.
Similarly, a 200-share investment in Pepsi (NYSE: PEP) — which has also grown its dividend consistently — in 1990 would have cost $21,420. With reinvested dividends, the position would have grown to $759,000 today. Again, imagine buying a $214,000 house in 1990 that is worth about $7.6 million today.
Going forward, dividends are most likely to grow in markets that are most likely to grow. Where do future markets look most promising? The same place economies are growing at light speed — emerging markets.
Dividends and emerging markets seem like two terms that don’t go together. Emerging markets have been known for capital appreciation and have typically not paid dividends. But things are changing. As these markets mature, more and more companies are beginning to pay dividends, returning more cash to shareholders than ever before. In fact, about 634 equities in the MSCI Emerging Markets Index paid dividends as of the end of September, according to data compiled by Bloomberg and JPMorgan Chase.
Investors have been noticing. The WisdomTree Emerging Markets Equity Income Fund (NYSE: DEM) is an exchange-traded fund (ETF) that invests in 292 emerging-market dividend-paying companies (as of December 31) and currently yields about 3.3%. Although DEM was formed in 2007, it has since outperformed 99% of all emerging-market ETFs, returning more than 30%.
In addition to strong growth, emerging-market dividends offer something else — diversification from the U.S. dollar. As the dollar continues to decline, the relative value of many emerging-market currencies appreciates, increasing the value of dividends in dollar terms.
Here are a couple of promising dividend payers…
CPFL Energia SA (NYSE: CPL) is a Brazilian utility holding company and one of the largest companies in South America, with a 13% share of Brazil’s power distribution market. The utility serves 6.4 million customers concentrated in the affluent states of Sao Paulo and Rio Grande do Sul.
A booming economy and population growth have led to consistently rising power usage. As earnings for CPFL have increased, so has the dividend, which has grown by an average of more than 27% in the past five years and by 37% in 2010. The stock currently yields a solid 6.4%, with the next dividend payment expected in May. The stock has returned a stellar average of more than 18% per year in the past five years, compared with an average of less than 3% for the S&P 500.
There is no withholding tax on the dividends. Payments are made in Brazilian reals and converted to U.S. dollars. Brazil’s stronger relative economic growth bodes well for the future strength of the real versus the dollar, which could help sweeten the dividend when it is translated into dollars.
Philippine Long Distance Telephone Co. (NYSE: PHI) is the largest telecom provider in the Philippines, serving more than 60% of the nation’s fixed lines and about 55% of the cellular market. The Philippines is one hot market. The economy grew at a whopping 7.3% in 2010 and the Philippine stock market was the best-performing market in the world for the year, posting a 77% return.
The market has pulled back about 12% from its highs, and Philippine Long Distance has also pulled back 18% from its yearly high. Although the market has recently consolidated, the future appears bright for the Philippine market. The government has forecast 8% GDP growth for 2011.
The stock pays two dividends a year, which totaled $4.80 per American depository share (ADS) in 2010, equating to a yield of about 9%. This company also has a strong history of raising dividends, which have risen more than 600% since 2005. Consensus analyst estimates are calling for earnings growth of 9% in 2011.
Action to Take –> Reinvesting growing dividends over time has proven to be an amazing wealth builder. Emerging markets will likely provide strong economic growth in the years ahead. Both of these stocks are excellent candidates to provide consistent and growing dividends in the years ahead.
P.S. — I don’t know if you’ve seen this or not, but a Texas man has figured out how to collect thousands of dollars a month in dividend payments alone. Last year he made $41,161 this way. Whether you’re on a fixed income or not, I’m sure you could benefit by copying this man’s formula for your own use. Here’s everything you need to know…