Get Wealthy Through Dividends

By The Web Master 

Many people believe that dividends are a slow way of making money and that the amount of money paid out is a pittance compared to the massive capital gains you can make. They also site that the tax implications of dividends are not as favorable as capital gains. Well I say any stock investor should be taking advantage of both dividends and capital gains as a unified joint long term strategy to increasing wealth.

Dividends are simply money that is paid out to the owners of the company based on the number of shares that you own. In many cases this amount is small when compared to the price of the share. This ratio is commonly called the dividend yield, or the dividend divided by share price. As the share price increases the yield will decrease and vise versa. If you target your stock selection carefully you will find this works in your favor, driven by solid growth of the underlying company that you have invested in. For instance, assuming you’ve selected a company with growing revenues that has shown a history of year or year growth, paying out some of the profits to their share holders, it is likely the companies management will want to keep the dividend yield fairly steady over time. If the share price continues to increase at a regular pace, due to increased revenue and profits, they will likely raise the dividend payout as well. This therefore means you not only have a capital gain on your investment but your share of the profits is increasing over time as well. A double wammy!

Now let’s look at what happens over an extended period of time. Assume you’ve done all the right research and you have $10,000 to invest. You can easily leave it in a bank account and over ten years it might be worth $11,000 for a net increase of $1,000 or 10%. You likely could do a bit better with a GIC. If you spend a ton more time researching stocks and actively trade you might still make even more and if you get real lucky you could strike it reach and turn $10,000 into $1,000,000. Not very realistic though is it. Besides, perhaps you don’t have the time to become a true expert in stock trading. Another option you have is to buy a quality dividend paying stock with a track record of steady growth and increased dividend payouts. Take the Bank Of Nova Scotia as an example. In 2001 BNS was paying a dividend of $1.24 with a share price of around $40.00 or a yield of 3.1%. In 10 years, through the many ups and downs of the market including the worst recession since the depression you would have made a 50% capital gain on your $10,000 or $5,000. The dividend would have increased in the same period to $2.08. This means your yield on your initial investment is now $2.08/$40.00 or 5.2%. Certainly larger than any current GIC and continuing to grow! In addition to your $5,000 in capital gains you would have received 10 years of dividends: $310, $362.50, $420, $400, $660, $750, $870, $960, $980, $980 for a total of $6,692.50. Adding in your capital gains you would have more than doubled your money. This is better than your bank account, better than a GIC and much safer then actively trading stocks. This doesn’t even take into account if you used the proceeds of your dividends to purchase more shares or if you continued to add to your investment. Clearly this is an excellent way to build wealth.