If you’re looking for a high-yielding dividend stock that pays more than 5%, you know that in most cases it’s going to involve taking on some risk. But that doesn’t always have to be the case. Below, I’ll show you how an investment in a blue-chip dividend stock can generate 7% or more in annual dividends for your portfolio.
Let’s take a stock like Toronto-Dominion Bank (TSX:TD)(NYSE:TD) for example. Currently, it pays investors a quarterly dividend of $0.79. If you bought the stock at $60, then that would mean you’d be earning a dividend yield of 5.3% per year. It’s a solid payout considering you’re also holding shares of one of the top bank stocks in the country.
However, given the bank’s track record for increasing dividend payments, you could be earning a lot more in dividend income in the years ahead.
Here’s how much you can make over the years
Five years ago, TD was paying a quarterly dividend of $0.51. That means that on average, the bank’s been increasing its dividend payments by 9.1% during the past five years. Its most recent increase, however, was noticeably smaller at just 6.8%.
For the purposes of being conservative, let’s assume that TD will continue to increase its dividend at a rate of 6% per year — which may still be optimistic given the recession the economy’s in.
Here’s how much investors can be earning from shares of TD over the next 10 years, assuming the payouts increase by 6% every year and if you invested $10,000 today:
|Year||Quarterly Payment||Annual Dividend Payment||% of Original Investment|
You’ll notice that by year five, the stock’s dividend could already be up to $1.06. That would mean you could be earning more than 7% on your initial investment. The longer you hold onto the stock and the more that TD raises its dividends, the higher that percentage will go.
This, of course, doesn’t factor inflation into the equation. But it shows that rather than hanging onto the money and investing it in five years in a stock that pays 5%, you’d be better off investing it into TD today. And if things in the economy improve sooner than expected, TD could be hiking its payouts by a lot more than just 6%.
What makes investing in TD an even better option is that the stock’s likely to rise in value itself. The gains in the stock’s value combined with its dividend income can lead to significant returns over the years.
Why does this matter?
For investors, this should serve as a reminder as to why you’re likely to earn bigger and better returns if you’re a long-term investor as opposed to someone who’s focused on the short term.
Rather than focusing on what dividend stocks are paying today, investors should be looking at where their payouts may be in a year or two. That’s why dividend growth stocks can be especially valuable to long-term investors.
As long as you don’t have a burning desire to pull your money out within just a few months, you’re going to be better off holding your investments for the long haul.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.