By The Sizemore Letter
On my last trip to Baltimore, I sat down with InvestorPlace’s Alyssa Oursler to explain why dividend investing makes sense for young investors.
It’s not just about generating income in retirement. If used in the right context, dividends can be used as a growth and quality screen as well. A well-built dividend stock portfolio built early can set you for life. Here is an excerpt from Alyssa’s article:
Should young investors care about dividends? According to Charles Sizemore, the founder and editor of the Sizemore Investment Letter, the answer is “absolutely.”
It’s not just because yields are nice and dividends foster good behavior from management. Instead, the real appeal comes from dividend growth potential. As Charles explains, ”If a dividend payout is growing every year, the yield on your initial investment could be massive.”
Let’s look at PespsiCo (PEP), one of InvestorPlace‘s Dependable Dividend Stocks. The food and beverage giant currently rewards shareholders with 57-cent payout every quarter. That totals a $2.28 payout every year, so if you divide that by the current share price of approximately $79, you get a dividend yield of around 2.9%.
But consider this: If you had bought PepsiCo stock 10 years ago, your yield on cost would be much larger.
In the fall of 2003, PEP was trading for $44 per share and shelled out a quarterly dividend of 16 cents — good for an annual payout of 64 cents. Anyone who bought into PepsiCo at that time wouldn’t have been blown away by that 1.5% yield. But now that the dividend has grown steadily for a decade, those investors have an eye-popping yield on cost.
Take the current $2.28 payout per share and divide it by the 2003 share price of $44, and you have a yield north of 5%. Not to mention, investors also are sitting on the capital gains reaped since then.
If PepsiCo continues to increase its payouts, as it has been doing for more than 40 consecutive years — including during the financial crisis — investors buying today could watch their yield on cost increase big-time as well.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”
This article first appeared on Sizemore Insights as VIDEO: Young Investors Should Focus on Dividend Growth