Thursday, September 8, 2011

A fun example to prove my point

So you've heard me talk about how great dividend stocks are and how they can build serious wealth over time, but I haven't really proven this with a real-world example.  I thought about putting together an example of if your great-great-grandparents bought $100 of Colgate-Palmolive back in 1885 when they first started (and have never stopped since) paying a dividend and how it would be worth millions today... but that's hard to relate too.

Instead I'd like to give an example of a company that has paid a dividend since the mid 90's.  Its a company I have owned for several years now in my Roth IRA. Of course this is still an extraordinary example, but it truly demonstrates the power of dividend investing. The stock is Realty Income (O), a real estate investment trust (REIT).

I will cover REITs in depth in later posts, but a brief explanation of these stocks is that they are typically real estate companies that own properties that they lease out.   Nearly all of their profits are paid out as dividends to their shareholders.  Realty Income goes as far as to call themselves the "Monthly Dividend Company" because they pay out dividends every month to its shareholders instead of quarterly like most.

Anyway, back to the fun example which makes me want to own a time machine. Realty Income became a public company in 1994.  So let's play the "what if" game and instead of me spending $500 on a stereo system for my car in 1994, I instead invested that hard-earned money in Realty Income:

Initial Investment
Initial Stock Purchase Date
Initial Stock Purchase Price
Initial Number of Shares
Number Dividends Paid
Final Number of Shares With Dividend Reinvestment
Closing Price as of 09/07/2011
Final Value of Shares With Dividend Reinvestment

And there you have it, a great example of the compounding affect of reinvesting your dividends.  A mere 57 shares and $500 turns into 2,403 shares and $82,840 in just 17 years!  This isn't a typical example, but its one we can all relate to since it all happened in just the last two decades.

Oh, and by the way, Realty Income now pays a yearly dividend of $1.74.  So our 2,403 shares * $1.74 = $4,181 a year in dividend income.  Not bad for a $500 initial investment.  Beats the hell out the stereo system that is now in a landfill somewhere.

Full Disclosure: I am long O

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