Let Dividend King Shares Take You to the Promised Land | Personal Finance

(Stefon Walters)

A well-rounded investment portfolio should include dividend-paying companies. As a shareholder, dividends are one way to be rewarded for holding onto your investments, and when used properly, they can be a large part of your portfolio’s total return. However, not all dividend-paying companies are created equal. If you’re looking for consistent, established companies, look no further than Dividend Kings.

This is why you should let them lead you to the promised land.

Image source: Getty Images.

They have stood the test of time

Dividend Kings have been awarded their honors for having managed to increase their annual dividend for at least 50 consecutive years. Being able to hold a dividend for that long is an achievement in itself, but being able to increase it for that long is an entirely different achievement. With Dividend Kings, you know you’re investing in companies that have stood the test of time.

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Every company titled Dividend King in 2022 has at least increased its dividend since 1972. During that time, these companies endured some of the toughest economic conditions the US has experienced. Dividend Kings Made It:

  • Black Monday (1987).
  • Dot-com bubble collapse (2000).
  • The Great Recession/Financial Crisis (2008-2009).
  • COVID-19 pandemic (2020).

There are many solid companies that had to cut their dividends at the time, including prominent Fortune 500 companies, but Dividend Kings held their ground and weathered the storm.

There is power in the DRIP

While receiving dividends can be a great source of income, the real power comes when you enroll in your brokerage firm’s Dividend Reinvestment Program (DRIP). With DRIP, any dividends you receive are automatically used to buy more shares of the company or fund that paid them out. This adds to the power of compound interest.

Let’s imagine we have two funds — one with no dividend and one with a dividend yield of 2.5% — and you contributed $500 monthly to both funds and received an annual return of 10% (the historical average of the S&P 500). Assuming the dividend yield stays the same, this is what the account totals would look like 25 years from now:

Fund Dividend Yield Contributed amount in 25 years Account total after 25 years
Fund 1 0% $150,000 $590,000
Fund 2 2.5% $150,000 $864,000

Data source: author calculations

With no extra effort, receiving (and reinvesting) dividends increased your account total by approximately $274,000. As a dividend investor, it helps to defer cash payouts until retirement, when having an additional source of income can be more beneficial. Until then, you can reap big rewards by using a DRIP. Even if you manage to accumulate $500,000 in a fund with a 2.5% return, that’s $12,500 in annual payouts.

More importantly, it helps to invest in Dividend Kings because in good faith you can not only rely on the dividend, but also anticipate an increase. Your dividend payout increases, your number of shares increases and you receive higher payouts; it’s a circle you want to get stuck in.

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