Dividend Power: Investing for Generations

01/24/2014 9:00 am EST

Focus: STOCKS

Jim Powell

Principal Analyst, Global Changes & Opportunities

With the Fed continuing to keep interest rates near zero, I think Wall Street's upward path will continue, at least, most of the way through 2014, forecasts Jim Powell, editor of Global Changes & Opportunities.

However, I think we will see more price swings than we did last year. Alas, the screaming bargains we enjoyed over the previous two years are largely gone. And a correction is also long overdue.

Fortunately, you don't need ultra-low prices to become a big winner with dividend stocks. Unlike the fixed interest rates paid on bonds, top companies usually increase their dividends from year to year.

As the payouts increase, so does the effective yield on the money that was invested. It's very sweet. Two examples show how rewarding dividend growth can be.

The current yields for Wal-Mart (WMT) and Target (TGT) are 2.30% and 2.70% respectively. Those returns are respectable, but are nothing to get excited about.

However, Wal-Mart's dividend per share has increased at a 16% annual rate since 2004. Target's has increased 17.6%. After ten years at those rates, the effective yields on today's cost for the stocks (often called yield on cost) would be a very impressive 8.75% and 11.62% respectively.

It can get even better. If you reinvest the dividends every year for the ten years, your effective yield for Wal-Mart and Target would be an even more impressive 12.96% and 18.97% respectively.

The bottom line is, after cooking along for several years, dividend aristocrats start to return serious money. The stocks are wealth engines that just keep chugging away.

You don't need to do anything except check them from time to time to make sure they are performing as expected. Not everything in life is hard.

If you have not started to think in terms of multiple generations of your family, please make it your number one priority. Your children and grandchildren will have your honored photo on their walls, and will name their own children after you.

At the minimum, your family trust should hold the iShares Dow Jones Select Dividend Index (DVY). I also think you should consider the iShares International Select Dividend Fund (IDV) that invests in foreign companies with good payment histories.

I can't overemphasize the power of compound earnings to create family wealth. All that's needed to make it happen is to expand your time horizon beyond your own lifetime.

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