Is there one best income investing strategy?seven-wonders

The question frequently crosses our email inbox at High Yield Wealth. The answer depends on market conditions. No strategy can be considered in a vacuum: interest rates, dividend yields and current market conditions influence every strategy.

That said, there is one strategy that appears to trump all income investing strategies over time. It’s dividend growth investing. What I also refer to as Ninth Wonder investing.

Most of us are familiar with the Seven Wonders of the Modern World: the Great Wall of China, the Taj Mahal, the Colosseum, etc. Fewer are familiar with the Eighth Wonder: Einstein’s observation of compound interest. As Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Einstein was really referring to the power of unimpeded compounding. If $100 were allowed to simply earn 5% each year, and the 5% earned was reinvested at the end of each year at the same 5% rate, the $100 would grow to $13,150 in 100 years.

I like Eighth Wonder investing. When we actually had real positive interest rates, the Eighth Wonder was a useful strategy for conservative investors.

For building greater wealth, though, I prefer the Ninth Wonder.

The strategy is remarkably simple, yet incredibly powerful. It requires no unique insight, exceptional skill or superior acumen. All it requires is a solid dividend growth stock and time. That’s it.

I’ll demonstrate by way of example with High Yield Wealth recommendation McDonald’s (NYSE: MCD).

Every investor is familiar with McDonald’s; every Wall Street investment house has an analyst who follows McDonald’s. Indeed, 21 analysts regularly peruse McDonald’s financial statements. The company is well vetted.

But McDonald’s is a first-rate dividend grower. It has paid a dividend and raised its dividend every year since 1976. As McDonald’s dividend claws to higher ground, it invariably pulls the share price along for the ride.

McDonald’s Dividend and Share Price Growth

McDonald's-dividend-share-price-growth

Over the past 20 years, McDonald’s share price has appreciated at roughly 9.9% annually. Over the same time, the dividend yield has averaged roughly 2.5% at the going market price. So basically, you’re looking at a 12.5% average annual return – nice, to be sure.

Actually, it’s a lot nicer than that. Over the past 20 years, your initial investment (your wealth position), would have increased more than 600%. Your income position would have also risen. The annual dividend was $0.13 per share in 1995. At the end of 2014, it was $3.28. An initial cost basis of $14.50 a share in 1995 would yield 22.6% today.

Over the 20-year time frame, you’d have collected over $23 in dividends alone.

If you had invested $1,000 in a 5% bond and let the interest compound, after 20 years you would have had an investment worth $2,653. If you had taken that same $1,000 and invested in McDonald’s stock (67 shares), your $1,000 would be $6,500 on price appreciation alone. But you would have also collected $1,540 in dividends. Your Ninth Wonder wealth position would be $8,040 compared to the Eighth Wonder wealth position of $2,653.

Simple, elegant, powerful. That’s why I call dividend growth the Ninth Wonder.

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Published by Wyatt Investment Research at