Saturday, July 23, 2005

The Power of Dividends

Why I Like 'Em and How I Track 'Em

The thing that I like best about dividends is that they grow on a regular basis. At least the stocks that I select to purchase tend to do. One of my most important stock selection criteria is a growing dividend. Each and every year, a company's dividend must have increased.


Why do I want this? So that my money can compound rapidly. Let me give you an example. On December 17, 2003 I made my first purchase of IGM Financial (IGM-TSX). When I bought it at $30.50, the company was paying a yearly dividend of $1.02 per share. This gave me a yield of 3.34
%. Today, IGM Financial pays investors $1.29 per share. My average cost on these shares, after purchasing some more shares and reinvesting dividends, is $31.64. $1.29 / $31.46 = 4.08%. After only a couple of years, my dividend yield has gone from 3.34% to 4.08%. That is compounding at its finest. It will only get better as IGM continues to raise its dividend (I hope!!).

How do I track this? I have set up a little spreadsheet that does the calculations for me. It looks like this:

On the 'Purchase' side, I input all my original purchases, the price I bought the stock at and the dividend the stock was paying at the time. This gives me my then dividend yield. On the "Current Yield' side, I recalculate my buy price to take into account any additional purchases and dividend reinvestments and the current dividend to arrive at my new dividend yield. This provides me with a good picture of which way my dividends are going. You will see I have a fair way to go before I hit a 5% yield, but it is going up nonetheless. If you have any questions please do not hesitate to drop me an email or comment.

Transactions for the Week

July 22, 2005:
Stock: The Coca-Cola Co.
Transaction Type: Dividend Reinvestment

Amount: $10.22

Good Book:
To learn more about the power of an increasing dividend, check out Lowell Miller's, The Single Best Investment.

2 Comments:

Anonymous Anonymous said...

After only a couple of years, my dividend yield has gone from 3.34% to 4.08%.

No. Your yield is whatever the stock is yielding today. Your statement reflects one of the biggest misunderstandings about dividend based investing.

8/09/2005 06:56:00 PM  
Blogger The Dividend Guy said...

This is a very hotly contested argument in the dividend-investing world. I remember reading an entire discussion about it over at the Motley Fool in one of the dividend message boards. Basically, the way I look at it is in terms of effective dividend yield - measuring the effect of a growing dividend on the amount of income a particular stock is throwing off. Calculating my effective dividend yield in this way provides me with proof that my investment is working and providing me with an increasing stream of income. I like this article at the Motley Fool to help describe what I mean (ignore the sales pitch!). Let me know why you don't think this is a good way to calculate the effective yield.

Thanks for the comment,

The Dividend Guy

8/09/2005 08:44:00 PM  

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