On February 20, I got a 10.1% “pay raise.”
That’s a nice increase – it’s about twice the rate of inflation, which slowed to 5% year-over-year in March.
Technically, I wasn’t really the one to get a raise.
Rather, the money I have at work got a raise. Regardless, it still translates to cold, hard cash in my pocket.
It’s all thanks to following a key principle that’s been a huge boost for my wealth over time. If you can master it, you can increase your wealth, too.
You can fund a pleasant retirement… Put the kids or grandkids through college… Or put some speculative “fun money” into assets with asymmetric return potential like cryptocurrencies.
So let me explain this particular raise…
How to Supersize Your Investment Income
I own shares of McDonald’s (MCD). As a shareholder, Mickey D’s pays me dividends… And I don’t even have to work the fry machine.
On February 20, the company raised its quarterly dividend payment to $1.52 per share. That’s up from $1.38.
At current prices, shares pay out a yield of just 2.1%. That’s about 25% higher than the S&P 500’s dividend yield of 1.7%, but it’s by no means a high yield.
But the secret to investing isn’t the current yield. It’s staying invested in a company growing its payout over time.
I bought McDonald’s shares at $55 in March 2009. I’d been watching the company for years.
Let’s face it — with a strong brand, loyal customers, and a low price point for its burgers and fries – McDonald’s tends to hold up well.
More importantly, it has a recession-proof business model.
After raising prices in the first quarter, the company said its comparable sales grew by more than 12% over the same time frame last year.
So it’s no wonder McDonald’s is making new all-time highs right now.
In fact, I’m up about 5.4x my money in 14 years.
But that’s just counting the price appreciation.
At a cost basis of $55, the $6.08 in annual dividend payments translates into an 11% yield.
That’s my “yield on cost.” It’s an incredibly useful metric with a dividend investment to see how it’s doing.
If I want to sell my McDonald’s shares, that’s the hurdle that I’d want a replacement investment to clear.
Few safe investments offer an 11% return on my money. So even with a low dividend yield today, dividend growth can create a great investment.
I have no doubt people will continue to have “Big Mac attacks.” So chances are my yield on cost will only keep rising.
By the time I retire, I may even be earning more in dividends than what I originally paid for shares.
That’s the power of investing in dividend growth stocks. Let’s look at the advantage of dividend stocks, and how you can employ this strategy today.
Turn Patience Into Profits
Sure, dividend investing isn’t as exciting as chasing the next meme coin or meme stock…
If anything, it’s downright boring… But companies that grow their dividends over time offer several attractive features.
First, dividend stocks have lower volatility than the market on average.
You can determine that by looking at a stock’s “beta.” The beta shows how a stock moves relative to the overall market.
A beta of 1 means the stock is as volatile as the overall market. Anything higher than 1 is considered more volatile, and lower than 1 is considered less volatile.
Since 1990, the data on Dividend Aristocrats (stocks that pay increasing dividends annually for at least 25 years in a row) indicates a beta of 0.8, compared to 1.0 for the stock market as a whole.
That’s perfect for volatile markets because it offsets the explosive moves we often see in investments like cryptos and tech stocks.
Second, dividend stocks tend to be in mature industries with steady growth. That gives them tremendous cash flows to pass on to investors… and the likelihood of an increasing dividend over the long term.
Finally, the magic of compounding makes dividend stocks ideal for any long-term investment strategy.
We want to reach the point where our investments are returning ever-increasing wealth… Reinvested dividends make that process happen much more quickly.
How to Invest in Income-Growing Stocks in 2023
Much like bonds, income-producing stocks took a hit last year as interest rates rose. But lower stock prices also translated into higher yields.
Even better, most dividend growers increased their annual payout over the past 12 months. That’s a good sign of long-term strength.
Over time, watching cash roll into your portfolio – or watching your share count grow with each dividend reinvestment – is where the real magic of wealth creation happens.
And right now, there’s still an opportunity in dividend-growth stocks. Last year’s lower prices have translated into higher starting yields for today’s buyers.
With the market still contending with rising interest rates, stocks have already had a strong move higher in 2023. But they’re still well off the prior market highs.
To play today’s markets, one compelling strategy is to break up your buys into thirds.
You’d start by buying a third of a position now. When the Federal Reserve announces that it’s done raising interest rates, buy the second tranche.
You can buy the final tranche as soon as the Fed reverses course and cuts interest rates.
Using this strategy can take the risk out of buying all at once ahead of a market dip…
That’s why it’s a great time to focus on dividend-growth stocks – particularly those that have announced their annual increase in recent months like McDonald’s did in February.
A focus on dividend growth is a key principle for a lifetime of investment success.
Today, you’ll grab a higher starting yield. And when markets turn around, you’ll earn capital gains, too.
Analyst, Palm Beach Daily
P.S. If you’re looking for another way to generate income, Daily editor Teeka Tiwari recommends a tiny subsector of crypto that will benefit from a coming “buying panic.”
Unlike most cryptocurrencies, these tokens are programmed to pay you monthly income on top of capital gains. And they’re set to benefit from a surge of activity coming to one of crypto’s largest networks as early as this week.
During his special event, he explained what this catalyst is and what types of tokens will benefit from it. For a limited time, you can stream it right here.