Who wouldn’t like a 50% return on investment? At such high interest, I could watch passive income roll into my account every month without having to do anything.
If I had £1,000 to spare, I’d like to earn £500 over a year. Such a high return wouldn’t happen straight away, but many investors seek this kind of payout.
One of the best ways to achieve this is to take a lesson from the Dividend Aristocrats. This type of company teaches one of my favourite lessons about investing – especially when targeting big dividends.
Dividend Aristocrats
To be clear, no stock pays out 50% a year. Any CEOs confident enough in cash flows to pay a regular 50% dividend would find themselves in charge of the most popular stocks on the planet.
A deluge of investors would send the share prices shooting up and the yields would come down quickly.
Even a 20% dividend is a stretch. Special dividends or buybacks sometimes bump payouts close to that amount, but still some way short of turning £1k into a yearly £500.
The secret is to find wealth-building income shares. These shares can take a small stake and multiply the amount over time, often ending up with massive dividend payments. This is where Dividend Aristocrats shine.
In short, a Dividend Aristocrat is any stock to increase dividends for 25 years running. Paying out more each year is a strong sign of a well-run company with management planning ahead and investing capital well.
Big targets
Even from quality stocks like this, I might receive only a modest dividend in the first year. My cash return won’t be anywhere near 50%, but I could target much higher earning power.
First, I can reinvest the return so I own more shares. On top of that, I’d expect the following year’s dividend to increase too.
Together, I hope to watch the value of my shares and the income I receive grow exponentially until I earn seriously impressive dividends.
The data backs up the earning power of these kinds of stocks too. A report from AJ Bell studied FTSE 100 returns between 2007 and 2017.
Firms with a 10 years or more streak of increases beat the rest of the market by nearly three times.
Not far away
By harnessing the power of dividend-increasing stocks, I can work towards my passive income goal of taking my starting stake and receiving 50% in dividends.
That said, there are no guarantees here. I can lose money with any kind of stock.
To go back to that report, AJ Bell calculated an average 12.6% yearly return from these stocks. If I could achieve an above-average return like that then my 50% goal wouldn’t look too far away.
In fact, £1,000 invested at that rate earns over £500 in the 13th year. While that’s hardly fast, it’s all the evidence I need to see the importance of finding quality dividend-increasing stocks.
