Analysts at Edward Jones studied the performance of stocks from 1972 through 2010. They found that when you factor in a stock's yield and changes in share price -- in other words, its total return -- the highest-yielding shares in the S&P 500 actually lost an average of 0.3% annually. By contrast, stocks that increased their dividends returned 9.6% on average during this stretch.
Say you invested $100,000 in a stock yielding 3%. You'd earn $3,000 in income this year. But assuming that payout grew 15% annually, it would take only five years for your annual income to grow to $6,000. True, you'd have earned $6,000 right off the bat by going with a 6% yielder. But if the company was straining to meet those lofty payouts and was forced to cut its dividends, then where would you be?
Dividend growth can also help your income keep up with inflation, says Edward Jones strategist Kate Warne. She points out that since 1947, the rate of dividend growth has outpaced inflation by nearly two percentage points a year.
SPDR S&P Dividend (SDY) (SDY) 3.1% yield; three-year annual return: 5.8%. This MONEY 70 fund sets the dividend growth bar high: It invests only in companies that have increased their dividends for 25 consecutive years. That makes for an exclusive club of 60 companies, including McDonald's (MCD, Fortune 500) and Exxon Mobil (XOM, Fortune 500).
Thornburg Investment Income Builder (TIBAX) (TIBAX) 5.6% yield, three-year annual return: 5.5%. Since Income Builder was launched in late 2002, the dividends it has produced have grown 11% annually. The fund takes a global approach, investing 49% of its assets overseas and holding 23% in bonds and cash.
Vanguard Dividend Appreciation (VIG) (VIG) 1.9% yield; three-year annual return: 4.2%. This ETF tracks stocks with at least a 10-year history of hiking payouts, such as Caterpillar (CAT, Fortune 500) and Coca-Cola (KO, Fortune 500).http://money.cnn.com/2011/06/08/pf/investing_for_income.moneymag/index.htm?section=money_pf&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_pf+%28Personal+Finance%29
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