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Why you should invest in shares paying great dividends

by , 19 October 2013

If you're looking for an investment that could provide you with an income, then look no further than shares paying dividends. To ensure that you make the best investment, you need to find companies that pay consistent dividends. And not just that, the company has to grow these dividends over time. Here's why you should invest in shares paying great dividends...

There are plenty of investments out there that will pay you a rising income annually Marc Lichtenfeld in Investment U explains...

One way it to invest in shares that raise their dividend every year.

Let's look at the benefits of dividends with an example...

Company A has a current dividend yield of 4.6%. It has raised the dividend for each of the past four years and five of the past six. The dividend's compound annual growth rate has been 13%.

Let's assume that dividend growth slows to 10%, just to be conservative.

An investor who puts in R10,000 today will receive R463 in income this year - a 4.63% yield. Not bad in this low interest rate environment.

In five years, he'll receive R677, a 6.7% yield. In ten years he's taking home R1,091 or a 10.9% yield. He'll have collected R7,379 or 74% of his investment. And he'll still own all the shares of stock.

Let's say you're more forward thinking than most investors. You hand onto this shares for decades. After 20 years, you're making R2,831 per year and have collected R26,518.

In year 40, the annual dividend is R19,050, nearly twice what you paid for it. During that time, you'll have received over R204,000 in income. And the value of those shares will have increased to R178,000, assuming historical average stock market returns.

Reinvest your dividend to boost your returns

If you don't need the income today and choose to reinvest the dividend, the numbers become astronomical.

In 20 years, your R10,000 grows to R131,783 and spins off R8,445 per year in income, if you choose to take it. Or hold on for another 20 years, when the original R10,000 is worth more than R3.3 million, generating R334,000 a year in income.

Shares that raise their dividend every year are a great way to get some income today and an even larger "pay cheque" further down the line.

So there you have it, why you should invest in shares paying great dividends.

Why you should invest in shares paying great dividends
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