Think a 10% dividend yield is unachievable? Think again

Edward Sheldon explains how investors can achieve dividend yields of over 10% by investing in dividend growth stocks for the long term.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

More often than not, whenever you hear the term ‘10% dividend yield,’ it’s time to run for cover. In most cases, a super-high yield is a signal that the market has no faith whatsoever in the company’s prospects and is therefore expecting its dividend to be cut in the near future.

However, what if there was an investing strategy that allowed you to enjoy yields as high as 10%, 15% or even 20%, without taking on any excessive risk or investing in high yielding stocks that could possibly see their dividends cut? The good news is that such a strategy exists.

Welcome to the world of dividend growth investing.

Consistent dividend increases

Dividend growth investing is the process of investing in companies that consistently raise their dividends. By investing in a company that does this, a 4% dividend yield, can over time, grow into a formidable double-digit yield, simply through the power of compounding.

The table below illustrates how dividend yields can grow over time.

Year

4% yield

5% growth pa

4% yield

6% growth pa

5% yield

5% growth pa

5% yield

6% growth pa

0 4.00 4.00 5.00 5.00
1 4.20 4.24 5.25 5.30
2 4.41 4.49 5.51 5.62
3 4.63 4.76 5.79 5.96
4 4.86 5.05 6.08 6.31
5 5.11 5.35 6.38 6.69
6 5.36 5.67 6.70 7.09
7 5.63 6.01 7.04 7.52
8 5.91 6.38 7.39 7.97
9 6.21 6.76 7.76 8.45
10 6.52 7.16 8.14 8.95
11 6.84 7.59 8.55 9.49
12 7.18 8.05 8.98 10.06
13 7.54 8.53 9.43 10.66
14 7.92 9.04 9.90 11.30
15 8.32 9.59 10.39 11.98

Achieving a double-digit dividend yield isn’t a complicated process, however two key ingredients are essential.

First, you’ll need to identify and invest in high quality businesses that will grow their dividends for the foreseeable future. Ideally you’re looking for dividend growth of at least 5% per year. Then, you’ll need significant patience. A 4% yield won’t grow into a 10% yield overnight. You’re most likely looking at a 10-15-year holding period to see a 4% or 5% yield transform into double-digits. If you get panicked out of the market at the first sign of volatility, this strategy will be much harder to execute.

However with a little bit of research into quality dividend growth stocks and a buy-and-hold strategy, you’ll have every chance of being able to enjoy sizeable returns in the future.

Dividend growth champions

Let’s look at some examples of dividend growth investing in practice. Diageo and British American Tobacco are two companies that have grown their earnings and dividends strongly over time. 

If an investor had bought Diageo shares 15 years ago at a price of 715p, the stock would have come with a dividend yield of 3.1% as 22.3p dividends per share were paid for FY2001. However if the investor still owned the shares today, they would now be receiving 59.2p per share in dividends, which is a sizeable 8.3% yield on the original purchase price. And with Diageo’s dividend payout forecast to rise over the next few years, it wouldn’t be long before the investor was enjoying a 10% yield. 

Similarly, if the investor had purchased shares in British American Tobacco 15 years ago for 560p, the dividend yield at the time would have been 5.2%, as 29p in dividends per share were paid at the time. However, last year the tobacco giant rewarded shareholders with a dividend of 154p per share, which equates to an amazing yield of 27.5% on the original purchase price if the investor still held the shares. 

These examples illustrate the amazing power of dividend growth. By simply holding onto high quality dividend growth companies for the long term, investors can be rewarded with incredible yields in the future, without taking on any extra risk. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »