Forget Yield -- Dividend Growth Is The Metric That Matters For Retirement Income

Income investors had a little scare in May and June. Bond prices took a tumble and dragged down assets that have come to be viewed as bond substitutes—including popular dividend-paying stocks, MLPs and REITs.

Now that the dust has settled and the income markets have regained some semblance of normalcy, let’s take a step back and review the case for income stocks.  With the Fed’s quantitative easing eventually coming to an end and with bond yields likely to rise in the years ahead, does it still make sense to look to the stock market for income?  Or might investors be better off buying and rolling over a bond ladder to meet their income needs? READ MORE

Disclosure: Long O, WMT

TAGS: [O] [WMT] [JNJ]

Ka-Ching! Realty Income just gave me a 19% raise

Realty Income Corp. (O) announced last week that it will be increasing its monthly dividend from  $0.15175 per share to $0.1809167  (yeah, that's a lot of numbers beyond the decimal). This is a whopping increase of 19.2% and gives Realty an effective annual yield of 5%, up from 4.2%.

So how did a company with a 5 year average dividend growth rate of under 3% manage to make such a large increase? Realty's recent successful bid to acquire American Realty Capital Trust (ARCT) allowed them to make such a move. The buyout was announced this past summer, but shareholders of ARCT were not happy with the initial offer. It took some sweetening on Realty's end to get the job done, including a one-time cash payment of $0.35 / share to ARCT investors, but the overall deal looks like a good one for Realty shareholders.

Roth IRA Move: Sold Some (O) to buy (HAS)

Since doing my analysis on Hasbro I've been digging deeper into the company's financials and continue to like what I see.  On Tuesday I decided to make a purchase in my Roth IRA, the problem was I didn't have cash in that account as I'm fully allocated. Something I have been contemplating though was selling some of my Realty Income (O) stock as it has been on a tear the past few years.

You may recall that Realty is the company I used to show the power of compounding.  It has been a strong performing REIT since it became a public company, and has treated me well for the past several years I have owned it.  In fact, I was lucky enough to purchase the majority of my shares in 2009 when the market was at record lows, so I'm up over 100% on my position and have been collecting monthly dividend payments along the way.

So if its been treating me so well why sell?  Good question, here's why.

Boring Terms We Need To Know: REIT

Wouldn't it be nice to own real estate and collect regular payments from renters while the property you own continues to increase in value?  Of course  you typically have to have a lot of money (or debt) to own these rental properties.  You also have to have the knowledge of what properties would make good investments vs what would be a money trap.  Being a landlord is certainly appealing, but I don't have the capital or in-depth real estate knowledge needed to be successful.  That's why I like Real Estate Investment Trusts (REITs).

REITs are corporations that primarily own and usually operate real estate that generates revenue.  These properties can include hotels, commercial office buildings, rental homes, apartment complexes, etc…  The great thing about REITs is that they are required to pay 90% of their annual taxable income to its investors in the form of dividends.  By doing this the corporation reduces or eliminates having to pay taxes.  As you can imagine, paying out 90% of a company's income can lead to large dividend payments and yields.

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).