When evaluating dividend stocks, much of the focus is on the current yield — calculated by dividing the annual dividend by the share price. Identifying stocks with a high current yield is simple enough. But the real wins come when investors are able to pick out the stocks that will consistently grow their dividends over time.
A look back at one of the best performing Dow 30 stocks illustrates how companies that are able to grow revenue and dividends over multiple decades can deliver huge value to shareholders.
Home Depot in 1981
Even more than Apple (AAPL), Home Depot (HD) is the stock many investors should regret passing on. In 1981, a share of the hardware store could be purchased for about $10. In January 1982, HD completed a 3-for-2 share split. Over the next several years, the company would complete 12 more share splits. An investor who purchased and held a single share in 1981 would own more than 340 shares today:
In the late 1980s, Home Depot initiated a dividend to its shareholders and increased the payout on several occasions. Between 1992 and 2015, the dividend has increased at an average annual rate of about 18 percent. That might not sound too impressive, but the impact of compounding returns looms large.
8,065% Dividend Yield
The combined result of the two charts above is remarkable. As mentioned previously, a single share purchased in 1981 and held has now multiplied to approximately 342 shares. Based on the current quarterly dividend of $0.59, the cash flow from each share purchased in 1981 is just north of $806 per year. Using the original purchase price of $10, that corresponds to an annual dividend yield of about 8,065 percent.
Home Depot is an extreme example — it’s growth has far outpaced the other Dow stocks — but it illustrates how powerful a force dividend stocks can be. The challenge, of course, lies in identifying the stocks that are positioned to experience significant growth over an extended period of time.
This article, The Best Dividend Stock Ever, first appeared on Dividend Reference.