which one of the following is an underlying assumption of the dividend growth model? This is a topic that many people are looking for. khurak.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, khurak.net would like to introduce to you Compounding Dividend Growth Investing VS Compounding Interest (Why It Matters for YOUR Retirement). Following along are instructions in the video below:
“This video. I m going to show you the true power of why i invest invest in dividend. You re gonna see why compounding dividends absolutely crush compounding interest in video. My name is mike the cpa welcome to money in life tv.
Thank you so much for joining us. I want you to picture. This just for a second imagine if i told you for every dollar you gave me i would start you off with a 3 interest rate and every year after that i would raise the amount of interest. I m giving you by an average of three to five percent every single year.
If that was me i would be like that sounds like a pretty darn good deal what are you selling drugs you re like no i m gonna show you how to invest in dividend growth stocks and you can get these same results now ladies and gentlemen imagine with me for a moment. If you will that you give your money to another person. And this person says for every dollar you give me i m going to give you less and less and less interest every year can you guess who this person is have you heard of this person before you certainly have they re known as the banks. If you d have been putting your money in a savings account or a an interest bearing checking account.
Essentially. What has been happening for the past ten years or so is almost every single year. The amount of interest you get on your money. Keeps.
Declining and declining and declining and you re like oh my gosh. Where s my money where s my return. While the banker. Lends out your money at four five six seven percent makes money off of you off of your hard.
Earned money without basically giving you anything in return this is why ladies and gentlemen. Although. I do have cash in the bank. I do why most of my money is outside of the banking system and in the markets or in other types of assets.
That will keep growing and help me hedge off inflation now who here s a visual learner. I m totally a visual learner. Which is why i have some basic examples to show you how compounding annual dividend growth works and why you re gonna be able to make your mama proud when you learn to invest this way when you start thinking differently about your money and how quick it can grow using this method. But before we get into the video.
I need you guys to do me a huge favor otherwise nobody gonna see this information over youtube. So if you could support the channel by dropping a like leave a comment below and make sure to subscribe so that you do not miss any of our future videos around finances. Investing and taxes. Thank you very much let s dive into it as i talk about the compounding annual dividend growth rate.
I want you guys to know this is one of the key things i look at when i m analyzing the company especially a company. I m looking at to invest in for not only income. But for growth. His history of strong dividend growth could be in future dividend growth is likely which can signals strong long term profitability in a case.
You don t know what profitability means just know. That s a good thing. That means. The company is making money and has more money to pay to you for you being a shareholder.
The dividend growth rate is the annualized percentage rate of growth that a stocks dividend undergoes over a period of time now that that technical jargon is all out of the way. Let s look at some visual examples. Which is gonna help add some clarity to what we re discussing here the first example that illustrates compounding dividend growth is using the company american waterworks now if you ve watched my videos before you know i absolutely love this water utility company. And guess what my body also loves water.
I bet yours does too and so this company has been doing well for a really long time and one of the aspects or one of the proofs in the pudding of them doing well is they ve been able to increase their dividend payout pretty much every single year for the past gosh pay me 10 plus years they ve been doing fantastic when we zoom in on the forward yield of american water works. We see that the current yield is only one point four six percent and you re like mike. I can t live on one point four six percent. I can t even feed my cat and my goldfish with that kind of yield and i say don t worry they keep raising their dividends as you re about to see sometimes the yields of these investments can be deceptive.
We have to look at where that dividend payout has come from and where it s going well into the future this chart over here is what i pulled from yahoo finance. And that i pasted to this excel documents starting in 2014 is when i became a shareholder of american waterworks when i became a shareholder the quarterly payout per share was only 31 cents per quarter. Which is not much but watch how this grows in 2015 that payout grew to 34. That s it s about a 10 increase over the previous year in 2016.
That payout grew to 37 and a half cents. Another tempers increase you guys starting to see a pattern here in 2017. Their quarterly payout grew. The 4150 are 41 and a half cents and now in 2019.
The payout is currently 50 cents. And i have not looked at what it is for 2020. But but are the odds pretty good that it s gonna be going up 10 percent probably because for the past. I don t know how many years even before further back than this this thing has been increasing their annual dividends.
By about a rate of 10 percent. That s the internal dividend growth rates of their underlying dividend payouts in 2020. So what i ve done is the average is about 10 percent from this history. We have so far so if we want a forecast or project.
This information into the future. Well what can we do is we can just we can assume that the nics payout is going to be 55 cents or 10 percent greater than 50 cents right and if we expand that down if it keeps growing at this rate year after year after year. Essentially you re gonna see that your yield just keeps increasing your payout keeps increasing and you re gonna see that within about ten years or so your yield has actually grown by a hundred and eighty six percent and that is why when you give this company in a dollar every year. The amount of dividends or think of it like interest they re paying you is growing at ten percent on top of the original payout.
They were giving you to begin with which is very freakin powerful. So not only can you drink water and keep your body hydrated shoot you can make some good money off of this now. Let s look at procter. Gamble just real quick.
The same concept. I want to illustrate this with a couple different kinds of companies. So you can see how much company s dividend growth rates can increase or not increase or how they can fluctuate and so on and so forth. So we understand how this works because each company is unique just like you re unique in case.
Nobody s told you you re special now for procter gamble actually went back to 2009. Now. I didn t start investing in procter gamble. Until about 2016 or so i can t remember we win.
But in 2009. I wanted to give you a broader time range so we started with a 44 cent quarterly dividend payout per share and as it grew as you can see the first few years. It grew at a very substantial rate 9. Percent.
8 percent 7. Percent. And then it has been decreasing since. But lo and behold over the past 10 years.
That payout has grown by an average of about five percent. But in the past. I would say like three or four years. You re looking more at about a three percent annual dividend growth rate.
Which is what if i were forecasting this the method. I would use at this rate in roughly about 14 years you would have doubled yield your yield would have grown 100 percent over what initially started from let s look at another example. Now. This one s a reit now reits are one of my favorite kinds of investments.
Because i get to participate in real estates receive that quarterly income or monthly income and watch my payouts grow now this is crown castle international corp. They actually started now i ve covered this rate in a previous video. The they went turned their company into a reit in 2014. So.
2014 and 2015 are pretty crazy in terms of how much they ve increased their payout and this is totally unusual. But good for you if you own this investment way back then because the growth in yield was huge godzilla size increases godzilla size now if you had gotten in back in 2014. If you were lucky enough to get in at that point. And you held this for about ten years.
Which is what i ve projected this out to be in 2025. I would suspect their yield would be around one and a half dollars per. Share then that is a three times start 33. Times the amount of dividend yield that you initially started with freaking awesome.
This is microsoft. Which is known as a growth stock. But boy have they been increasing their dividend payouts as you can see they ve been after their average compounding dividend rate is roughly fifteen or fourteen percent per year. If you look at it over the past ten years of how their dividend payouts have grown and if basically if you ve held this for 10 or 15 years your dividend yield has about six times or that s where it s headed at this rate.
So i hope this illustrates and you can visually see how when you invest in a dividend growth stock that can routinely increase its dividend payouts. Then you re going to be able to make more and more more money off those same sets of shares and your interest rate. Or your yield is going to keep going up. Now.
I threw in one etf example. This is a vanguard v8. Why vym. Which is a very popular etf that people like to invest in for dividends and they re what i found with vanguard or with most etfs is they re not as stable the terms of their quarterly payout.
It fluctuates a bit more than something like a stock. But what i did is i took the every every quarter. When i looked at yahoo finance. The dividend payout was different even every quarter of each year.
So they have some consistency. What i did in this example is i just took their march payouts of every single year since 2009 to give it some consistency and what i found is after all these years their average increase of their dividend is about 8 for this etf. Hopefully. These examples have highlighted for you how a company can continue to raise their dividend payouts.
Now. None of what we talked about includes capital appreciation. This is all separate from that and most of the investments. We re talking about here which i own pretty much every single one of these investments.
Except for maybe vym have appreciated greatly in value so not only are you getting the capital appreciation. But you re getting all this extra income on top of the appreciation. It s a wonderful deal. It s fantastic you should know it doesn t mean that a company can continue this forever.
There are times such as a market recession where they ll gonna have to cut their rates. But what i ve seen happen as i ve studied the history of several companies is if they cut their rate. What they do then they start increasing it again as the economy improves. So even if the economy goes into a recession.
We fall into a bear market your dividends may be cut temporarily. But as long as the company s a healthy company a stable company. I think you can expect those dividends to keep increasing once again after the economy starts to recover before i wrap up the video today i want to show you guys this article. I found online and i think it should really show how powerful compounding dividends can be and we re in this article.
And i ll leave a link to this article in the comment section. Now i didn t check this guy s numbers. But let s just read the article let s let s talk about it briefly here for a second there s basically two investors. And there s investor.
A and there s investor b. An investor a which is talked about of this this part of it right here. It says investor a chooses to purchase a fixed rate investment. Which earns 4 and will reinvest the interest each year.
The powerful benefits of compounding are illustrated by the fact that the amount of interest each year becomes larger and larger and larger even though. The interest rate remains that is stable four percent. So investor a invest in a bond with a fixed four percent interest rate. And just lets it grow for 30 to 50 years.
It says. In 30 years. The fixed rate investment grows three times as big as the original investment in 50 years. The value increases over seven times.
The original investment amount now that is for investment. A is for investor. A and then we have investor b. Which i hope this is going to be you because this is gonna be me i can tell you that this is what i would have already been working on for the past four or five years.
And it says investor b chooses to invest in dividend growth stocks and participates in compounding through reinvesting dividends our illustration assumes a four percent dividend. Payout or four percent. Dividend yield. Which is the same as investor a and with a modest three percent annual increase in the dividend stock price.
Which if we go back to our example. Here of these we re talking about increase. We re talking about year over year increases. So basically like an increase such as like procter gamble.
Where they re raising their payout about three percent per year. Now let s go back to the article. Now as we read the as we read this results now for investor b. The results are freakin astounding ugh if this doesn t fire you up guys.
I don t know what will you might want to go see a doctor. But in 30 years. It says. The dividend investor.
The guy who chose to invest using dividends in 30 years. The value of their investments will have grown seven and a half times more than the original investment in 50 years. The portfolio grew almost three time s the original investment amount this example is a conservative one to imagine if your investor b were able to consistently purchase stocks that grew faster than a modest 3 in this example. So that what does authors that does he then illustrates how he compares an investor a which is this column right here.
And this is investor b. And how it comes out and after in year. 30. If you can see here investor a what their money would have grown to three hundred and twenty four thousand dollars.
Now this is now we started with a hundred thousand dollars. I forgot to mention in that part so both investors started with a hundred thousand so investor a after thirty years their money has ruined the three hundred twenty four thousand dollars. But investor b. We come over here their money and thirty years has grown to seven hundred and sixty one thousand dollars after forty years you can see investor a has four hundred eighty thousand dollars.
Whereas investor b. Has one and a half million dollars and of course their results are just crazy. But but even even after 35 years in i mean. It s about three times or two and a half times as much as investor a so i wanted to show you why dividends absolutely dominate and just investing for interest are focusing on interest.
I get questions a lot about why do i invest this why why don t i just focus on growth or these other aspects of investing. Which i do i do that as well and they don t a lot of people don t understand why i want to invest using dividends well. I think this really illustrates it. But as you can see to try to verbally explain this without visuals.
It s really hard to convey what s actually transpiring here. If you re a long term dividend investor. I hope you can see from this example. How powerful divins can actually be and hey guess what if you still have money when you re gone you know this now this money is gonna keep coming in year after year after year.
And you might never deplete. The principal value of your account. Because your dividends are providing you enough income to live on without drawing down your original investments so if you have a large dividend portfolio. Guess what you can do you can pass that on to your next generation and they can pick up the income where you left off and start receiving that income and keep growing it further and further into the future and can really build a legacy for your family and they can then reinvest that into the markets or they can invest in real estate.
Whatever they want to do doesn t really matter they re gonna have those options and that is the powerful dividend investing and that is why didn t dominate compounding interest well that s the video today guys. If you liked the video make sure you drop a like leave a comment below let me know you what you think about this. Investing strategy do you think. It s still just so so do you think.
It s awesome do you would you rather invest in real estate or other assets. Let me know your thoughts. What you know this a good strategy or not i would love to hear your comments down below and if you re new to money in life tv welcome to the channel be sure to subscribe because every single week. Our goal and mission is to help you become fiscally fit.
We do that by teaching you finances investing taxes and more alright everybody this was a lot of fun as you can see i get really fired up. I think i need to get a drink of water now as i wrap up this video love you all live life on caged and i ll see you in the next video peace ” ..
Thank you for watching all the articles on the topic Compounding Dividend Growth Investing VS Compounding Interest (Why It Matters for YOUR Retirement). All shares of khurak.net are very good. We hope you are satisfied with the article. For any questions, please leave a comment below. Hopefully you guys support our website even more.