Firms that develop their dividends can yield a ‘double compounding’ effect. Even though many investors concentrate on capital gain as the main source of return from equities, history shows that long- term returns are improved a complete lot by the inclusion of dividends. 51,377. The difference is accounted for by the advantages of compounding – that is to say, the amplifying aftereffect of reinvestment.
However, this compounding impact can be further enhanced if an investor were not to focus just on any dividend-paying stock, but on companies that can grow their dividends, resulting in a “double compounding” effect. 1,980, like the reinvestment of dividends. 2,750. That is a vastly superior return to simply investing in the index. As a result, for this to work to greatest effect, you will need to concentrate your cash on companies that increase their dividends year in, year out – and stick to them for extended periods of time.
Consistency and endurance are what’s required. But what about high-dividend yields, so often targeted by equity income strategies? A higher yield is not an automatic signal of value. In fact, it can be an indication of trouble or limited development potential often. Without growth available, an ongoing company cannot sustain long-term dividend growth. Consequently, the return profile of the Telecom or utility sector – industries which currently yield the most – is typically predictable but unexciting; very much like a connection, in truth. A 6 per cent yield today may very well be 6 % in … Read the rest
