Imagine that you had the foresight to put $25,000 to work in Realty Income (O) in December 2004, after it became a dividend achiever. Over the next decade, the company keeps expanding, and grows the monthly dividend payments to its loyal shareholders from $0.109375/share to $0.1821667/share. As a result, you collect $15,000 in dividends over the next ten years. You have a few choices to deal with that cash:
A. Reinvest it back into Realty Income Stock
B. Reinvest it into another income generating stock
C. Save it in the bank for a rainy day
D. Spend it
Now, if Realty Income went bankrupt tomorrow (absolute worst case scenario), you would still have something of value, if you chose options B and C. Under all scenarios however, the dividends you received from the asset covered a large portion of the price you paid. This shows that a company that pays you a growing dividend over time, fueled by the improving business fundamentals, and purchased at attractive valuation, can pay for itself in less than a couple of decades.
In essence, the dividend checks you receive every month or quarter or year, act as a sort of rebate, that essentially reduces the amount you have invested and have put at risk. Therefore, if you bought Realty Income at a split-adjusted $25/share in December 2004, and you manage to collect $25 in dividends over the next 10 – 15 years, you have essentially recovered your whole total investment. However, in the case of a Realty Income investment in 2004, you would still own your stock and you would have a higher claim on dividend checks, simply because the future is more than ten years long. Even if Realty Income never pays more than $2/share for the next 40 years, you would make several times your initial investment amount. Therefore, your risk was only $25, and was limited. But your reward was unlimited.
It is also important to not forget that a $1 today is worth more than a $1 from 2033, due to the eroding power of inflation. However, if that dividend at least keeps up with inflation or is reinvested in other income producing assets, chances are that each dollar would multiply exponentially over time.
For example, if you purchased shares of Eastman Kodak in 1983 for $1000, and you used the dividend checks to put in the bank or invest in other companies, you would be ahead of the game. This is because you would have collected dividends for 25 years in a row, and would have been able to put this money to work for you. The stock traded at a split-adjusted $33.83/share in 1983, but paid a total of $37.28 in dividends for every share through 2008. In addition, you received shares in Eastman Chemical (EMN) in 1994, due to a spin-off from Kodak.
The important thing to take away from this exercise is that you should not merely focus on stock prices themselves, as they do not show the whole picture of your investment returns. Even if the stock you hold drops by 50% after purchase and stays there, or even if the stock price fluctuates manically each year, you should not care, as long as you keep collecting those dividend checks.
I usually accumulate all my dividend checks in cash, and add them to the contributions I make to my dividend portfolio. After that, I allocate the cash in the best valued quality dividend stocks I could find at the moment. So far I have always been able to find something to put my money in, but if I was short of ideas, I would simply keep the money in cash.
Full Disclosure: Long O
- Realty Income (O) – The Monthly Dividend Company
- Realty Income (O) Raises Dividends by a Record 19.20%
- Five Free Dividend Stocks
- Why would I not sell dividend stocks even after a 1000% gain?
- Reinvest Dividends Selectively
A dividend king is a company that has managed to increase dividends every single year for at least 50 years in a row. There are only 20 com...
One of the advantages of being a dividend investor is that I invest in businesses that meet a certain qualitative and quantitative criteria...
I like to invest in quality companies, with an established track record of dividend increases. I want to acquire these quality companies at ...
This guest post has been written by Mike McNeil, passionate investor, founder of Dividend Stocks Rock and author of The Dividend Guy Blog ...
Each week I review the list of dividend increases as part of my monitoring process. This exercise is helpful in evaluating how my existing ...
I wanted to thank you all for reading the Dividend Growth Investor website. This site is a result of my efforts to improve my investing over...
Most readers know me as a person that buys a stock in a company I like, and then I keep building a position as long as valuation and allocat...
CVS Health Corporation (CVS), together with its subsidiaries, provides integrated pharmacy health care services. It operates through Pharmac...
The J. M. Smucker Company (SJM) engages in manufacturing and marketing branded food products primarily in the United States, Canada, and int...
Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. This dividend champion has paid dividends since 1977...