In my last post I talked about receiving dividend income. I am kind of fascinated by dividend yield and feel it is one of the most powerful wealth building formulas next to compound interest.
“Yield” simple means the % return you can expect from an investment. So if you bought a $100 savings bond for example with a 3% annual yield, you would expect that bond to be worth $103 a year from now. Your $100 investment yielded a 3% return.
Some people argue that an investment that doesn’t have a clearly defined yield is not really an investment at all, it’s a gamble. I tend to agree.
Let’s look at a real world example of how a stock’s dividend yield can grow over time.
In Nov. 2009 I bought some shares of Bank of Nova Scotia. I wanted to buy some shares of a Canadian Bank and after doing some research, I settled on Bank of Nova Scotia because they are one of the more international of the big Canadian banks. In fact they just bought 51% of Banco Colpatria in Columbia this month.
They also have a long history of increasing their dividend payments to keep it around 4% of their current share price. This was important to me because I used the bank’s Dividend Reinvestment Program (DRIP) to purchase my shares, so that my quarterly dividends would be reinvested in additional shares.
So, in Nov. 2009, I bought shares at $48.91 and they paid an annual dividend of $1.96 or 4%. Since then the share price has risen to $54.55 and the dividend has risen to $2.08 or 3.8% of the current price.
Here’s where the magic comes in. My cost basis, (my original purchase price) for those shares I bought in 2009 will always be $48.91 but the amount of the dividend will rise over time. The company wants to attract shareholders by offering a 4% dividend whether you bought the shares in 2009 or 2012.
That’s why it’s important to invest early and stay invested.
Someone buying shares today is getting a 3.8% yield on Bank of Nova Scotia shares, but people who bought in 2009 like me are getting a 4.25% yield.
The real heroes are the brave men and woman who bought the stock for $24.83 in Feb. of 2009 when everyone else was selling. Right now they are enjoying a 100% gain in stock price and an annual yield of over 8%.