Do you know why Australians love to invest long term, in stocks with growing fully franked dividends?
Below I'll show you…
But first, it's important to know that since 1900 the Australian stock market has achieved an average annual return of 12%. $1 invested back then, with profits reinvested, would be over $395,000 today!
Needless to say, the Aussie share market has far outperformed both cash and bonds.
So what does this have to do with dividend yields?
Everything…
Hypothetically, let's say you invest in a company with a share price of $1.00 and a dividend of 5 cents, fully franked. Obviously, when you make the purchase, the investment would have a yield of 5% (or 7.1% grossed-up).
Now, let's say the company grows its payout at an average of 8% per year for 10 years…
| Year | Growth Rate | Dividend | Original share price | Grossed-up dividend yield |
| 1 | 8% | $ 0.0500 | $ 1.00 | 7.14% |
| 2 | 8% | $ 0.0540 | $ 1.00 | 7.71% |
| 3 | 8% | $ 0.0583 | $ 1.00 | 8.33% |
| 4 | 8% | $ 0.0630 | $ 1.00 | 9.00% |
| 5 | 8% | $ 0.0680 | $ 1.00 | 9.72% |
| 6 | 8% | $ 0.0735 | $ 1.00 | 10.50% |
| 7 | 8% | $ 0.0793 | $ 1.00 | 11.33% |
| 8 | 8% | $ 0.0857 | $ 1.00 | 12.24% |
| 9 | 8% | $ 0.0925 | $ 1.00 | 13.22% |
| 10 | 8% | $ 0.1000 | $ 1.00 | 14.28% |
| 20 | 5% | $ 0.1628 | $ 1.00 | 23.26% |
| 30 | 2% | $ 0.1985 | $ 1.00 | 28.35% |
As can be seen in the above table, if you hold onto your investment for 10 years, it would yield 14.28% grossed-up.
If, after the first 10 years, the company continues to grow its dividend by 5% annually, the grossed-up yield grows to 23.26% at year 20.
After another 10 years of 2% dividend growth, it becomes 28.35%.
But I know what you're saying to yourself: "You're dreaming mate, give me the name of one Australian company which has grown its dividend that strongly."
Well you only have to look so far as Woolworths Limited (ASX: WOW) or Westpac Banking Corp (ASX: WBC) for perfect examples.
Dividends + capital gains = A potential life changer
Another point to emphasise is that when companies pay an increasing stream of dividend yields, they are also likely to witness their share prices rise significantly, over time.
M2 Group Ltd's (ASX: MTU) dividend payout has risen from just two cents per share in 2005 to $0.26 cents in the last 12 months. Its share price is up over 2,500% in the same time.
Since January 1, 2009, the share price of veterinary services provider Greencross Limited (ASX: GXL) has risen 1,600% whilst at the same time, it has increased its dividend payment to 12.5 cents per share, up from just two cents per share.
Of course, it's rare to find many of these types of investments. That is, companies which can rapidly increase their dividend payments.
But the secret to picking the best dividend stocks of the future isn't being able to identify companies with rapid growth potential.
It's all about finding the companies with consistent, reliable and sustainable growth.
If you can identify a well-priced company which meets these criteria which has a long run way for growth, you can let time do the heavy lifting. Compounding your returns, along the way.
But ultimately, your success will depend on your temperament.
