“This will be good for Susan,” the man told my uncle.My cousin Susan was 8 years old at the time. My uncle’s best friend was recommending an investment that he had already put his own money into. For $15,000, my uncle could join a partnership in an office building on 39th Street and 1st Avenue in Manhattan.This conversation took place more than 60 years ago, so $15,000 was a large sum (even for a worthy cause like investing in your children’s future).My uncle was not in the habit of throwing money around without a lot of thought. He came from a poor family and had worked too hard for too long to be frivolous with his cash.The friend, however, was a successful businessman. My uncle trusted him and followed him into the partnership.The friend ended up being right. That investment has been very good for Susan. Today, Susan earns $48,000 a year in income from that partnership – more than a 300% annual yield on my uncle’s original investment.
A 60-Year Horizon
Susan is retired now. A former teacher, she has a decent pension with solid benefits. But does that extra $48,000 still come in handy? You bet it does. In 2019, she and her husband went on a monthlong cruise to Europe. Their house is paid for, and they can easily handle the cost of long-term care insurance so as not to burden their children should they get sick.They live well, thanks in part to my uncle’s $15,000 investment all those years ago.The money didn’t always belong to Susan. My aunt and uncle collected the income from the partnership annually for more than 50 years. But they never sold it, because they knew it would eventually be “good for Susan.”Very few of us have a parent or role model who looked so far into the future. As a result, we do not have an investment horizon of 60 years.But we all have a few Susans in our own lives – loved ones who could benefit from our investment skill after we’re finished with the investments ourselves.It might be six decades too late for you to get in on that Manhattan office building, but there are plenty of investments out there that will pay you a rising income annually while generating a ton of cash for you down the road.
How to Do It
My favorite way to set up this scenario is with Perpetual Dividend Raisers – stocks that raise their dividends every year.That’s because by lifting their dividends every year, their management teams have set the bar very high.Imagine what would happen if, after six decades of annual dividend increases, American States Water (NYSE: AWR) did not hike its dividend. As Ricky Ricardo from I Love Lucy might say, the CEO would have “some ‘splainin’ to do.”A CEO who breaks a long streak of dividend raises should probably get their resume together. Investors in such companies have come to expect annual dividend increases, and management teams work very hard to be able to provide them. If the dividend boosts were to suddenly come to a halt after 20 or 30 years, that would suggest a drastic change in the company’s business or prospects.Let’s assume you’re generating $10,000 per year in dividend income and your stocks grow their dividends by an average of 8% per year. Next year, you’ll receive $10,800. At the historical average U.S. inflation rate of 3.2%, you’d need only $10,320 to keep up. That means you now have an extra $480 to save, invest, or spend.Lastly, if you’re reinvesting your dividends, owning Perpetual Dividend Raisers helps you step on the gas of the compounding machine.Let’s say you have a $100,000 portfolio of dividend stocks that matches the historical average gain of the S&P 500. The portfolio has an average dividend yield of 4%, and you reinvest your dividends.After 10 years, your $100,000 will be worth $278,544, and you’ll receive about $5,300 per year in dividends.After 20 years, your nest egg will be worth $668,103, and the portfolio will spin off $6,100 per year in dividends.Not bad, right?But that’s not all…If instead of earning a flat 4%, your portfolio starts off yielding 4% but then averages an 8% dividend boost every year, the numbers increase significantly.In 10 years, you’ll have $310,764… $32,000 more than in the first scenario. More importantly, you’ll then be generating $11,780 in dividends, more than double what you would have made if the company did not boost the payout.In 20 years, the portfolio will be worth $978,406 – a whopping 46% more than in the earlier case. And if at that point you’re ready to stop reinvesting the dividend and take it as income, you’ll receive $38,290 annually. That’s a far cry from the $6,100 you’d get without the dividend increases.
That will be very good for your “Susan”.Perpetual Dividend Raisers are a great way to get some income today and an even larger “paycheck” for your heirs later.More By This Author:Orchid Island Capital: A Dividend Cut Is A Near-Certainty
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