Earn A 10% Yield From This Boring Bank Stock!

It’s dividend growth, not yield, that really counts.

| More on:
The Motley Fool

Investors are like dieters. They’re always looking for the quick fix.

‘How To Lose 20 lbs in 30 Days’

‘Get Amazing Abs Without Crunches’

‘3 Tricks to Get a Beach Body by Summer’

These headlines are appealing because they offer the results we want… fast. But as anyone who has actually lost weight knows, the only real solution is diet and exercise over  time. Anything worth doing takes time.

The same principle applies to investing. Many investors reach for the highest yielding stocks they can find. It’s a quick fix to generate income. But when it comes to building a retirement portfolio. it’s dividend growth, not yield, that really counts.

That’s because dividend growth uses the magic of compounding where by even a small “yielder”can become a cash flow machine if given enough time.

The Toronto Dominion Bank (TSX: TD, NYSE TD) is a great example of what the power of compounding can do for a stock’s yield. Over the past decade, TD has increased its dividend at a 10% compounded annual growth rate. If you had bought and held the stock over that time, the yield on your original investment would be almost 10% today!

Take a look at the table below to see what I mean. This example assumes that you purchased 100 TD shares around $34 per share at the beginning of 2003.

The Magic of Compounding

Year

Dividend per Share

Total Dividend

Yield on Cost

2013 $3.24 $324 9.53%
2012 $2.98 $298 8.76%
2011 $2.68 $268 7.88%
2010 $2.44 $244 7.18%
2009 $2.44 $244 7.18%
2008 $2.40 $240 7.06%
2007 $2.20 $220 6.47%
2006 $1.80 $180 5.41%
2005 $1.64 $164 4.82%
2004 $1.40 $140 4.12%
2003 $1.20 $120 3.53%

Source: Company filings

Let’s play out this thought experiment another 10 years. Assuming that TD can continue to grow its dividend at a 10% annual rate, by 2023 our yield on cost would be almost 25%.

Is that even possible? Maybe not. The previous decade has been one of the best on record for the Canadian banking industry. However, the company still has a long expansion runway in the United States. And even if TD’s growth rate slows, the returns for patient shareholders will still be impressive.

But many income investors would’ve skipped over TD in 2003 when it only yielded a measly 3.53%. Like the dieter, they wanted the fast return or the quick results today. They couldn’t see what years a compound growth could become.

Is it fun? No, but neither is diet and exercise. TD is a boring business. There’s no cool technology to speak of. It will never get a T.V. segment on Quick Money. But it has a wide competitive moat and will crank out consistent profits year after year.

TD is evidence that when it comes to building a stream of retirement income, the goal isn’t to find big yield. Rather, it’s about finding a dividend trickle that could one day become a raging river. This New Year’s, resolve to but a little more growth in your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Disclosure: Robert Baillieul has no positions in any of the stocks mentioned in this article. 

More on Investing

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Building a $50,000 Portfolio That Can Weather Any Market Storm

This defensive investment portfolio uses three ETFs to ride out any recession.

Read more »

Two seniors float in a pool.
Retirement

Want to Retire Rich? 3 TSX Stocks to Add to Your Portfolio Now

These TSX stocks could deliver above-average returns in the long run, helping you build wealth over time and retire rich.

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Top 3 TSX30 Winners: Understanding the Recent Stock Drop

Three TSX30 winners in 2024 have experienced price drops this year and continues to underperform due to massive headwinds.

Read more »

space ship model takes off
Dividend Stocks

Where to Put $12,000 in Today’s Market for Potential Long-Term Gains

There's no shortage of great investments that can provide potential long-term gains. Here's a look at three stellar options.

Read more »

Hand Protecting Senior Couple
Retirement

Avoid the OAS Clawback: Dividend Strategies Every Retiree Should Know

With a smart dividend strategy, the OAS clawback can be minimized or even avoided entirely for retirees. Here's how.

Read more »

Canadian dollars are printed
Dividend Stocks

How to Use $10,000 to Transform a TFSA Into a Cash Machine

Do you want growth and income? Consider these top investments that offer up monthly income in spades!

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

Building a $28,000 TFSA Portfolio One Contribution at a Time

Let’s take a look at how you can turn a $28,000 investment in a TFSA into a life-changing fund for…

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Making Your $25,000 TFSA Investment Work Harder for the Long Term

This strategy reduces risk while still providing a solid return.

Read more »