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Income Investors: How to Get a Safe 10% Yield That Grows at 10% Per Year

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Picture a 10% yield that’ll grow at a nearly guaranteed 10% per year.

Seems unsustainable and very suspect, eh?

Believe it or not, the double-digit yield and dividend-growth rate are not only sustainable; they’re nearly guaranteed. But of course, like most good things in life that seem too good to be true, there’s a big catch involved. The catch is, you’ll need to hold on to a particular type of dividend-growth stock for at least two decades before you’ll get that 10% yield that grows at 10% per year.

So, if you’re a trader who’s looking to make a quick buck, I’m sorry to break it to you, but this article isn’t going to help you get that 10% yield growing at 10%. It’s just impossible if you don’t have the time investment that’ll be required on your part to make such a payout possible.

If you’re still reading this article, I’m assuming you’re a long-term investor — a young investor like a millennial who has an investment horizon that spans decades. And if that’s the case, it’s time to get serious about dividend-growth stocks because they have the potential to make you a substantial amount of wealth over the long haul with a lower degree of risk.

Although the upfront yields of dividend-growth stocks like Canadian National Railway (TSX:CNR)(NYSE:CNI) (that meagre 1.5% yield!) may appear underwhelming relative to high yielders like REITs, telecoms, banks, or utilities, the dividend yield relative to the original invested principal has an opportunity to grow at an unmatched double-digit percentage rate on an annualized basis. No REIT can sustainably grow to support annual dividend hikes of that magnitude!

The only reason the upfront yield of some dividend growers is so low initially is due to the significant capital gains that have likely been posted over the last few years. These gains have driven down the dividend yield and although prospective investors may not see the dividend as a “main attraction” to quality dividend-growth stocks like the dividend aristocrats, after five, 10, or 20 years, it becomes more apparent that the dividend plays a massive role in the total returns you’ll be getting.

If you’re a young investor who just sits on a dividend-growth stock for 30 years, your yield has the potential to double many times over relative to your principal.

While you enjoy the handsome capital gains, you’re also setting your future self up with a huge income stream that has the capacity to continue growing at a double-digit rate. That’s unheard of with most securities with high upfront yields, but with dividend-growth stocks, it’s possible. But, of course, you need to understand that you’ll need to hang on to such a stock for decades before the income contributions become incredibly bountiful.

If you have the time and patience to hold such a dividend stock in your portfolio, you’ll probably never fear running out of money in retirement given the 10% in annual raises you’ll be getting. But before you go out and pick up any dividend-growth stock, it’s crucial that you do the homework to find a business that has a moat wide enough to keep the earnings-growth and dividend-growth rate sustained over very long periods of time.

CN Rail is one Dividend Aristocrat that’s been “beating and raising” for decades at a time. As North America’s most efficient railway, the management team is always two steps ahead of the competition when it comes to improving the operating ratio. Whether it’s through the leveraging of new technologies or the exceptional expertise of management in forecasting incoming freight volumes, you can be sure that CN Rail will be there to get goods moved from point A to point B in the cheapest way possible.

The barriers to entry are too high for CN Rail to get knocked off the podium. As such, investors can expect the company to keep its dividend-growth streak alive for the next five, 10, even 20 years. There will be bumps in the road for the economically sensitive name, but with a long time horizon, you’ve got more than enough time to ride it out as the gravy train keeps on rolling. All aboard!

Stay hungry. Stay Foolish.

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.

Fool contributor Joey Frenette owns shares of Canadian National Railway. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

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