Wealth Creation Through Common Stocks: The Power of Dividends

The surest and safest way for investors to build wealth is to take advantage of the power of compounding. Compounding is the process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period. One way for investors to take advantage of this process is by investing in dividend paying companies. Such companies are not hard to find. Indeed, most well established companies, both foreign and domestic, pay dividends. The key to unlocking real gains, however, is to, first, invest in a company that both pays a great dividend and is committed to growing that dividend over time.

To see how this strategy can pay off, consider the following data:

Company	Price on Jan. 2, 1985	2006 Dividend Per Share	Percent of original investment received in 2006
Pfizer (PFE)	$1.68	$0.96	57.1%
Johnson & Johnson (JNJ)	$2.23	$1.46	65.3%
Aflac (AFL)	$0.63	$0.55	87.0%
Citigroup (C)	$2.08	$1.96	94.1%
Altria (MO)	$3.33	$3.32	99.8%
Wells Fargo (WFC)	$0.96	$1.08	112.7%

All values split-adjusted.

Data Provided by the Motley Fool

The second key is to reinvest the dividends in more company stock. Consider the following example:

• A hypothetical investor who bought ten shares of Pfizer in April of 1960 for a total of around $350, who reinvested all dividends, would currently own 9,100 shares. Those 9,100 shares would pay $10,500 in dividends alone to our hypothetical, but very lucky, investor. That represents a yield, on the original investment, of around 3000%.

I could provide numerous other examples just like these, but why bother. I think the point is crystal clear. To create wealth one does not have to be a genius or, for that matter, much of anything. All it takes is discipline, patience, and a little starting capital. Good luck investing everyone!