Wells Fargo cut its dividend back in March.
At the time, it was yielding nearly 10% -- a figure that
turned out to be
too good to be true.
I didn't own Wells Fargo at the time (and don't today),
but I can sympathize with shareholders. A while back, lured
by a juicy yield, I bought shares of
International Paper ... not long before the
company reduced its dividend by 90%.
Ouch
Though you should view double-digit yielders
with a raised eyebrow, high yields aren't dangerous in
and of themselves. However, rather than chasing companies
that offer the fattest payouts, you'll do better to focus on
dividend
growthinstead.
You can double your dividends, and double the yield you
enjoy on the price you paid for your stock, just by being
patient. How?
Healthy, growing companiesnot only tend to pay out
sizable dividends, but also to increase those dividends over
time.
Math trick time
You can use the handy "Rule of 72" to see how long it
will take to double your yield. Divide the number 72 by the
expected growth rate, and you'll get the number of years
it'll take for your yield to double. For example, a stock
whose dividend grows at 12% annually would double your
effective yield in six years.
Let's try the Rule of 72 on some real-world examples:
Company
Dividend Yield
5-Year Dividend Growth
Vale (NYSE: VALE)
1.9%
31%
Johnson & Johnson (NYSE: JNJ)
3.1%
14%
ConocoPhillips (NYSE: COP)
3.9%
18%
Intel (Nasdaq: INTC)
2.8%
47%
Procter & Gamble (NYSE: PG)
3.1%
12%
Wal-Mart (NYSE: WMT)
2.2% Continued... |