I don’t know about you, but I believe the cost of energy and other essential services are only moving in one direction. For example, we’re paying over $100 per month in Enbridge gas bills right now. What will the cost of natural gas be in another 30 years? What will our hydro cost in another 30 years? Triple the price? Property taxes are only going up. Our insurance premiums have only one direction to go as well. Oh yes, not to mention, we need to eat and we haven’t even driven in our car anywhere yet.
The cost of goods and services are not going to decline over time. With the talk of inflation on the horizon, rising energy and living expenses are fairly predictable down the road in my opinion. That’s why I’m investing in dividend-paying stocks now. I predict these companies are going to provide me with the extra ammunition I’ll need to combat our financial needs of the future.
Take our holdings in Enbridge for example. We own this company because they pay a dividend; they reward us for being a shareholder. They are Canada’s largest gas distribution utility who serve almost 2 million customers who need gas (like us to live). Enbridge (ENB) has been in operations for over 160 years and for the last 58 years, they’ve paid shareholders. Their annualized dividend has grown from $0.0075 to $1.96 per share, an average of 10% per year. They currently pay a dividend of $0.49 per quarter. With just over 100 shares to our names that’s about $200 per year in dividend income ($0.49 * 4 quarters * 100 shares). Using Enbridge as just one dividend-paying example, I’ll use some conservative data. If you:
• Bought 100 shares of ENB today,
• At $60 per share,
• Assuming the stock price would grow at 3% (kept pace with inflation),
• Assuming the dividend would grow at 5% (much less than above),
• Assuming the dividend yield would stay around 3% (just lower than today), AND
• You sat around and did nothing for 30 years…
…that $6,000 investment would balloon to about $50,000.
While the value of your Enbridge investment grew more than 8 times over that period, more importantly your share ownership would grow more than 3 times: your original 100 shares would be 327 shares if you reinvested all dividends paid. Note: Current dividend income without any reinvestments from 100 Enbridge shares @ ~ $60 per share is $196.00 per year ($0.49 dividend per share * 4 quarters * 100 shares).
But what if I used Enbridge’s data: annualized average dividend growth of 10% per year?
The value of your investment would be 41 times larger over that period and your share ownership would be over 1,300 shares. In fact, what is more mind-boggling, your share value today of $6,000 would skyrocket to almost $250,000 in 30 years with all dividends reinvested!!!!!!!!!
i) The total value with dividend reinvestment equals the final stock price multiplied by the sum of the initial number of shares plus all dividend reinvestment shares. The number of shares is the initial number of shares plus all the shares purchased with reinvested dividends.
ii) The dividends paid with dividend reinvestment is the sum of yearly dividends paid on the initial number of shares and the reinvested dividends shares.
Will our dividend-investing strategy work?
It should because dividends don’t lie. Companies like Enbridge who can afford to pay shareholders are typically established companies that aren’t going anywhere. Enbridge hasn’t gone anywhere for 160 years. Year to date, Enbridge and a dozen other dividend-paying companies have paid us about $1,000 in income and we’re projecting to earn about $4,400 in total for the entire 2011 calendar year. This certainly isn’t get rich stuff, but it’s our start. Our plan is to use dividend-paying companies to supplement other tactics that make up our retirement plan because of the safety and income security they provide. Like you we have RRSPs but they are most compromised of indexed products. Our other angle of attack is to buy and hold good to great companies since they pay us to own them. After some further education on this topic in recent years I figure I might as well buy these types of companies. I’m consuming their services after all. Now, I’ve learned I can get a tax advantaged kick-back. When our Enbridge gas bill hits $200 per month in 5 years and maybe even $300 per month in another 10-20 years, I might just use my Enbridge dividend income to pay the thing off 🙂
Have you started to include dividend income as part of your retirement plan? Why or why not?
Share your thoughts!