Not too long ago, a friend told me his teenage daughter is getting interested in investing and asked for some basic advice. A few hours later, another friend texted me, asking how he can “get rich with dividends.” To me, the secret to making money in the long term is extraordinarily simple…compounding, explains Marc Lichtenfeld, chief income strategist at Wealthy Retirement.
For people who have never invested, the markets can seem like a mysterious and intimidating force – one that can gobble up their money at any moment. But the fact is, investing doesn’t have to be complicated.
When you invest and let your dividends and gains compound, the returns can be outstanding. To make it even simpler and easily digestible, I’ve created a strategy for selecting stocks in order to achieve excellent long-term results.
It’s called the 10-11-12 System.
The goal with the 10-11-12 System is to generate 11% yields within 10 years. If you’re reinvesting the dividends, we’re aiming for a 12% average annual total return over 10 years.
Twelve percent may not sound like much, but it more than triples your money in 10 years. And it grows your wealth by 10 times over 20 years.
A 12% average annual return beats the pants off the market and the overwhelming majority of professional money managers.
The 10-11-12 System focuses on investing in what I call Perpetual Dividend Raisers – companies that raise their dividends every year.
The strategy has three important components: Dividend yield, dividend growth, and time. To earn 11% yields and 12% average annual total returns, you need to invest in stocks with decent starting yields (usually 4% or higher) and strong dividend growth, and you need to stay invested for years. The higher the starting yield, the lower the dividend growth can be (and vice versa).
I caution investors not to go for the highest yields they can find. Companies with high yields can be very risky. We’re aiming for quality companies that have long histories of raising their dividends every year and will very likely continue to do so.
Investors who collect their dividends in cash will receive a raise every year. And if the companies boost their dividends by a meaningful amount, that increase should keep up with or beat inflation.
Investors who don’t need the cash right away should reinvest their dividends so that their investment compounds. The dividends will buy more shares, which will generate more dividends, which will buy more shares, and so on.
The numbers can get quite large. Many years ago, I recommended Texas Instruments Inc. (TXN). We ended up selling the stock in October 2023 for a gain of 430%. A month later, I recommended RTX Corp. (RTX), formerly known as Raytheon Technologies. It has returned 463%. That’s the power of investing in Perpetual Dividend Raisers.
