Savvy investors know that dividends are powerful wealth builders -- and not, as many assume, sleepy, safe stocks for your grandparents to own. For one thing, the stocks themselves are likely to appreciate in value over time. And the dividends they pay out often grow, too. That dividend income you receive can be reinvested in more shares of stock, helping produce a snowball effect.
Image source: Getty Images.
Check out the numbers below, adapted from a Hartford Funds report:
|
Dividend-Paying Status |
Average Annual Total Return, 1973-2023 |
|---|---|
|
Dividend growers and initiators |
10.19% |
|
Dividend payers |
9.17% |
|
No change in dividend policy |
6.74% |
|
Dividend non-payers |
4.27% |
|
Dividend shrinkers and eliminators |
(0.63%) |
|
Equal-weighted S&P 500 index |
7.72% |
Data source: Ned Davis Research and Hartford Funds.
Even if you enjoy average annual returns of just 8%, that can make you a lot richer over long periods. And you can certainly start with just a $200 investment -- ideally, though, you'll keep adding more over time. If you can manage to invest $500 per month, that's $6,000 per year. See what that can do -- and what twice that can do:
|
Growing at 8% for |
$6,000 invested annually |
$12,000 invested annually |
|---|---|---|
|
5 years |
$38,016 |
$76,032 |
|
10 years |
$93,873 |
$187,746 |
|
15 years |
$175,946 |
$351,892 |
|
20 years |
$296,538 |
$593,076 |
|
25 years |
$473,726 |
$947,452 |
|
30 years |
$734,075 |
$1,468,150 |
|
35 years |
$1,116,613 |
$2,233,226 |
|
40 years |
$1,678,686 |
$3,357,372 |
Source: Calculations by author.
How to invest in dividend-paying stocks
So, how should you go about investing in dividend-paying stocks? Well, you could learn to study and evaluate stocks and then carefully select the most promising ones. But that does take time, effort, and skill. If you want to go that route, here are some portfolio candidates (and their dividend yields) that you could research further to see if you find them promising:
|
Stock |
Recent dividend yield |
|---|---|
|
Altria |
7.62% |
|
Dow |
7.08% |
|
Verizon Communications |
6.65% |
|
Pfizer |
6.46% |
|
PepsiCo |
3.61% |
|
Medtronic |
3.49% |
|
Johnson & Johnson |
3.44% |
Source: Yahoo! Finance.
You shouldn't just grab the fattest yields you can find, though, as some high-yield companies can be in trouble.
Consider excellent dividend-focused ETFs
An easier -- and arguably even better -- way to invest in dividend payers is via exchange-traded funds (ETFs) that focus on companies with solid, and often growing, dividends. Each such fund simply tracks an index of dividend performers -- or has managers doing the work of identifying good dividend-paying companies for you. Each also spreads your dollars across scores or hundreds of dividend payers, offering instant diversification.
Here are some dividend ETFs to research further:
|
ETF |
Recent Yield |
5-Year Avg. Annual Return |
10-Year Avg. Annual Return |
|---|---|---|---|
|
SPDR Portfolio S&P 500 High Dividend ETF (SPYD -0.02%) |
4.39% |
6.95% |
N/A |
|
Schwab U.S. Dividend Equity ETF (SCHD 0.22%) |
3.8% |
10.94% |
11.02% |
|
Fidelity High Dividend ETF (FDVV 0.12%) |
2.78% |
12.82% |
N/A |
|
Vanguard High Dividend Yield ETF (VYM 0.16%) |
2.66% |
9.68% |
9.77% |
|
SPDR S&P Dividend ETF (SDY 0.09%) |
2.48% |
7.08% |
8.82% |
|
iShares Core Dividend Growth ETF (DGRO 0.21%) |
2.19% |
10.25% |
11.35% |
|
Vanguard Dividend Appreciation ETF (VIG 0.31%) |
1.60% |
11.30% |
11.35% |
|
First Trust Rising Dividend Achievers ETF (RDVY -0.30%) |
1.36% |
12.32% |
12.49% |
|
Vanguard S&P 500 ETF (VOO 0.14%) |
1.17% |
14.24% |
13.04% |
Source: Morningstar.com, as of Jan. 2, 2025.
I included a simple S&P 500 index fund at the end for comparison purposes. You can see that it, too, features plenty of dividend payers among the 500 large companies in the index. The overall yield is low, but the overall performance is high.
However you go about saving and investing for retirement, be sure to consider allocating a portion of your portfolio to dividend payers. Remember that while a 2% or 4% yield may not seem huge today, that payout will likely keep growing over time. And remember that you can start with a low first investment, such as $200. Just keep adding to your portfolio over time. The more you save and invest, the faster you should build some wealth.
