This Signal Says Dividend Increases Will Be on the Rise

Last week a colleague of mine put a clipping from The Wall Street Journal on my desk.

To be honest, the headline of the article — “Last Year’s Dividend Slash Was $58 Billion” — caught me a little off guard.

It’s not exactly the sort of thing you want to read as an income investor!

But within the article was a chart that contradicted the dreary tone of the headline. I’ve replicated the chart below, which shows the number of decreasing dividends against the number increasing payments for each of the last 10 years, according to Standard & Poor’s.

A quick glance shows that while 2009 had the most dividend cuts in recent history, dividend increases still heavily outweighed cuts — and in total there were more than 1,000 increased payments!

But this isn’t the best news.

Buried within the article was a statistic that really caught my eye. In the fourth quarter of 2009, only 74 of the 7,000 companies Standard & Poor’s tracks cut their dividend payments. That compares to the 288 cut in the fourth quarter of 2008.

In other words, while 2009 saw the most dividend decreases in recent history, dividend increases still heavily outnumbered cuts. And given the few cuts in the fourth quarter compared to 2008, it makes it all but certain the worst is over for income investors.

That’s why I’m taking the opportunity now build up my $200,000 real-money portfolio for my income investing newsletter, The Daily Paycheck.

Looking back at my chart, you can see why. Dividend increases dipped in the last recession too, while decreases soared. But coming out of that period, increases spread like wildfire — topping out above 2,500 a year in 2007. A repeat could be on the horizon in the years ahead.

The Importance of Rising Dividend Payments
But there are many investors — even income investors — that overlook the importance of investing in securities with rising dividends.

It’s not hard to see why. Many might think it’s hard to be excited when a monthly dividend rises from $0.10 to $0.11 per share.

But that’s the wrong way of looking at the situation. You see, instead of thinking that the payment rose one cent, investors should understand the payment actually increased +10% — and that can mean a big difference in your income.

Consider a stock trading at $15 per share and paying $0.10 per month. Right now, this stock yields 8%. An investment of $15,000 would translate to 1,000 shares and net you $1,200 a year.

But this stock also raises its dividend by +10% annually. After just five years, the monthly payment would now be $0.161, boosting your annual income to $1,932 — an increase of +61%!

As time goes on, your income stream only grows larger. In 10 years you would be earning $3,113 and in 20 years your payments would total $8,072 annually. That amount translates to a yield of 54% on your original $15,000 investment! And all these calculations don’t factor in capital appreciation.

Is it any wonder I’m taking full advantage of the current envriaonment to lock in yields before dividend increases ratchet higher?

P.S.: My “Mid-Month Update” for The Daily Paycheck came out just a few days ago. I’m taking advantage of the current market to lock in yields on one stock that has raised its payment an average of +24.6% during the past five years.

If you’d like to join me, I invite you to try The Daily Paycheck risk-free for 90 days. Visit this link to learn more.