They say, 'an investment in yourself pays the best dividends.'
I'd agree with that. Although the dividends of National Australia Bank Ltd. (ASX: NAB) and Retail Food Group Limited (ASX: RFG) come pretty close.
Boost your income with dividends
There are many gimmicks on the Internet promising 'stay at home income'. They have testimonials like 'I made $347 a day using just my computer' and a guy holding thousands in cash, as if he got paid with physical cash through the computer screen.
This is not a gimmick.
Companies pay dividends, usually half-yearly or annually, from their profits. Of course, you need money to buy shares in the first place.
Nonetheless, shares are a legitimate and tested way to boost your income stream. You buy shares in good companies, hold them and receive the cheque or bank deposit. Simple. You can start with just $500.
Shares are a riskier investment than term deposits and some other assets, too. But they have also outperformed property, bonds and cash over the long-term.
Further, you need a bucket load of patience and mental stamina to deal with the ups and downs of the market. However, good companies pay bigger and bigger dividends over time, meaning your 5% dividend return this year could become 10% in five years if the dividend payment increases.
In the sharemarket, time is your friend not your enemy.
An extra $3k
To generate an extra $3,000 per year from an investment in NAB shares, you would need to invest around $33,000 given its forecast 9.1% gross dividend yield. The 'gross' yield is your yield after you have claimed your tax credit from the tax office.
But buying more than one share is usually a good idea, for risk management purposes. Typically, buying 30 shares is recommended.
However, if you built a 50% position in Retail Food Group, the owner of Gloria Jean's, Donut King and much more, you would need $39,400 to make the $3,000 after tax income. That's only a little more money but your risk is now spread across two businesses.
By contrast, you would need around $128,000 in a term deposit to generate a $3,000 income stream, based on current term deposit rates.
Foolish Takeaway
Dividends are an effective way to grow your wealth over the long term. However, you need to pick good companies, be ready to hold them and cope with the ups and downs of the markets.
