Should young investors care about dividends? According to Charles Sizemore, the founder and editor of the Sizemore Investment Letter, the answer is “absolutely.”
It’s not just because yields are nice and dividends foster good behavior from management. Instead, the real appeal comes with dividend growth potential. As Charles explains, “If a dividend payout is growing every year, the yield on your initial investment could be massive.”
Let’s look at PepsiCo (PEP), one of InvestorPlace‘s Dependable Dividend Stocks. The food and beverage giant currently rewards shareholders with 57-cent payout every quarter. That totals a $2.28 payout every year, so if you divide that by the current share price of approximately $79, you get a dividend yield of around 2.9%.
But consider this: If you had bought PepsiCo stock 10 years ago, your yield on cost would be much larger.
In the fall of 2003, PEP was trading for $44 per share and shelled out a quarterly dividend of 16 cents — good for an annual payout of 64 cents. Anyone who bought into PepsiCo at that time wouldn’t have been blown away by that 1.5% yield. But now that the dividend has grown steadily for a decade, those investors have an eye-popping yield on cost.
Take the current $2.28 payout per share and divide it by the 2003 share price of $44, and you have a yield north of 5%. Not to mention, investors also are sitting on the capital gains reaped since then.
If PepsiCo continues to increase its payouts, as it has been doing for more than 40 consecutive years — including during the financial crisis — investors buying today could watch their yield on cost increase big-time as well.
Like what you see? Sign up for our Young Investors e-letter and get practical investing advice delivered to your inbox every week!