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How Dividends Can Still Make You Rich

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Monday, 11 Jul 2011 08:39 AM Current | Bio | Archive

What a difference a couple of weeks can make.

Last month the market was plummeting and this month it's on fire.

Employment numbers got worse, GDP growth projections have been scaled back for the year, housing prices hit new post-bubble lows, and the stock market fell for six straight weeks. But, that was last month. This month the market is soaring near post crisis highs.

With the market so erratic and unpredictable in the short term, it makes sense to look at some of the historically most successful investment strategies and apply them to the most promising industries.

The economy is sluggish but corporate profits are still solid. And, with historic low interest rates and overseas markets falling, money doesn't have any place else to go. So, for the time being, the market looks like a good place to be.
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One of the best and most proven ways to accumulate wealth is to buy dividend paying stocks and reinvest the dividends. Every quarter, your dividends buy more shares, adding to the total on which your next dividend payment is calculated.

Here are some real life examples.

If you purchased 200 shares of Johnson and Johnson (JNJ) on July 1, 1980, (an investment of $15,750) and just reinvested all the dividends without ever adding new money, the position would be worth $888,000 today, a 5,537 percent return.

To present this investment another way, it would be like buying a house in 1980 for $157,500 that today is worth about $8.9 million. Home values didn't appreciate anywhere near that much. That's the power of growing dividends.

Similarly, a 2,000 share or roughly $26,000 investment in Pepsi (PEP) in 1990 would have grown to $839,000 today, with reinvested dividends. Again, imagine buying a $260,000 house in 1990 that is worth about $8.4 million today.

Longer term investors can look to solid dividend paying stocks that appear well positioned for the future.

Two good prospects include Exxon Mobil (XOM) and Monsanto (MON).

Exxon Mobil is the world's largest public oil and gas company. The combination of rocketing demand and dwindling supply are likely to lead to significantly higher oil prices in the future, even without inflation. But inflation and falling dollar values seem likely to propel energy prices and Exxon's earnings in the next several years. In fact, both Goldman Sachs (GS) and Morgan Stanley (MS) are calling for $130 per barrel oil next year.

Exxon currently yields 2.3 percent but has raised the dividend every year since the 1970's.

Monsanto is the world's leading producer of seeds for corn, soybean, cotton, fruits, vegetables and other crops. As food becomes increasingly scarce throughout the world and prices continue to soar, Monsanto should be in a great position going forward.

The stock only yield about 1.5 percent but the quarterly dividend has already more than quadrupled in the past 10 years.

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TomHutchinson
What a difference a couple of weeks can make. Last month the market was plummeting and this month it's on fire. Employment numbers got worse, GDP growth projections have been scaled back for the year, housing prices hit new post-bubble lows, and the stock market fell for...
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Monday, 11 Jul 2011 08:39 AM
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