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Editor's note: This holiday season, we're taking a break from our normal commentary to share some of our favorite income-focused essays from Dr. David "Doc" Eifrig. We're kicking things off today with Doc's thoughts on one of the strongest ways to grow your wealth in the stock market...

The No. 1 Thing I Want From an Investment

By Dr. David Eifrig, editor, Retirement Trader
Tuesday, December 27, 2016

Some people like to invest in stocks. Some people like to invest in real estate. Some people like to trade commodities...
 
But all I want is an investment that goes up every year, regardless of what's going on in the stock market.
 
We call these businesses World Dominating Dividend Growers (or "WDDGs"). WDDGs are often the No. 1 or No. 2 companies in their industries. And they have a history of rewarding shareholders with growing dividends.
 
Let me show you what I mean...
 
What you want is a company with a chart that looks like this:
 
 
No, that's not a share-price graph. It's a picture of larger and larger amounts of cash placed directly into shareholders' pockets by a business that has paid higher and higher dividends each year.
 
Let's compare that WDDG graph with a chart of the S&P 500 from 2000 to 2016...
 
 
It's important to understand that you cannot safely rely on the stock market's action as a source of investment return. No share prices march straight up forever.
 
But everyone can invest in businesses with a history of consistently rising dividends. That's why investors who want to make consistent returns from stocks need to focus on dividends... and relentless dividend growers like WDDGs.
 
Now, investors love dividend stocks these days. That drives up their prices a bit. The best WDDGs don't always have very high current yields. Microsoft (MSFT), for example, is a WDDG – the one from our first chart. It yields around 2.5%. That's not very impressive when compared with some of the other dividend-paying stocks out there.
 
But real income growth – the type that always goes up – can be achieved by reinvesting those dividends.
 
Let's take a look at Microsoft to see just what reinvesting in shares with a growing dividend can do...
 
Microsoft started paying a dividend in 2003. Since then, it has grown the dividend every year (except for a small drop in the crisis year of 2009 – and it came back stronger than ever). For the last five years, Microsoft has increased its dividend by nearly 16% a year... And I see no reason for growth to slow down.
 
 
Microsoft has a decent current yield. But you can build that into a much better paying retirement nest egg...
 
For example, say you buy 100 shares at $62 per share. Total cost: $6,200. The stock yields about 2.5% and the dividend has been growing at 16% a year, so let's be conservative and assume that slows a bit to 10%.
 
At the end of the first year, you'll receive $155 in dividends ($6,200 x 2.5%). Since Microsoft raises its dividend 10% in Year 2, you'll earn about $171 in dividends.
 
Repeat this process for 10 years, and you'll make more than $400 in dividends in the 10th year. That's a 6.5% dividend yield off your initial $6,200 investment... or a 6.5% "yield on cost."
 
So with Microsoft, you'll be earning 6.5% over your cost within 10 years... And in 20 years, you'll be earning an astounding 16.9% over your original cost.
 
Even so, you can earn more. The yield above is what you'd get if you took the dividends as cash for spending. Instead, when you plow them back in, buying extra shares through reinvestment, you'll earn an even higher rate of return. Take a look...
 
Let's assume you buy 100 shares at $62 each and reinvest all of your dividends. Assuming 10% annual dividend growth and 5% annual share-price growth, you could turn an initial investment of $6,200 into more than $39,000 in just 20 years...
 
No. of Years
Total Value
0
$6,200
3
$8,342
5
$9,748
10
$14,766
20
$39,068

A rising dividend payout is one of the strongest ways to build wealth in finance... But as you can see, sitting back and letting your reinvested dividends earn their own dividends grows your investment dramatically.
 
Get started today, and you'll tap into an incredible income stream that rarely goes down.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig




Further Reading:

"If paying real cash to shareholders repeatedly is the sign of a strong business, paying more and more cash each year is perhaps the strongest sign of all," Doc wrote in DailyWealth in August. Read his "ultimate cheat sheet" on how to find these businesses right here.
 
A few years ago, Doc showed Growth Stock Wire readers how the timing of one investment could have turned a 39% gain into a 93% winner. Learn more here.

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Market Watch
Symbol Price
Change
52-Wk
S&P 500 2268.63 -0.1% +12.2%
Oil (USO) 11.65 +0.3% +9.3%
Gold (GLD) 108.20 +0.4% +4.9%
Silver (SLV) 15.24 +0.0% +12.1%
U.S. Dollar 102.86 -0.4% +4.5%
Euro 1.04 +0.1% -4.7%
Volatility (^VIX) 11.17 -2.5% -40.3%
Gold Stocks (^HUI) 165.53 -0.7% +48.0%
10-Year Yield 2.55 -0.7% +16.1%

World ETFs
Symbol Price
Change
52-Wk
Lat.America (ILF) 27.13 +0.8% +27.7%
Canada (EWC) 26.35 -0.9% +24.5%
Taiwan (EWT) 29.64 -2.5% +14.8%
USA (SPY) 226.13 -0.1% +14.5%
S. Africa (EZA) 51.27 -0.9% +11.5%
S. Korea (EWY) 53.49 -1.4% +5.6%
Japan (EWJ) 49.74 -1.7% +4.0%
Singapore (EWS) 20.34 -3.2% -0.3%
India (IFN) 22.01 -0.5% +0.9%
China (FXI) 35.25 +0.1% -0.7%
Israel (ISL) 16.11 -0.4% -3.7%
Russia (TRF) 10.58 +0.2% -3.9%

Sector ETFs
Symbol Price
Change
52-Wk
Semis (PSI) 36.65 +0.1% +44.9%
Transportation (IYT) 166.49 -0.8% +26.3%
Basic Mat (IYM) 84.51 -0.7% +23.9%
Telecom (IYZ) 34.56 -0.7% +23.6%
Defense (PPA) 42.38 +0.0% +22.6%
Industrials (IYJ) 122.37 -0.6% +22.3%
Insurance (IAK) 59.82 -0.6% +21.3%
Construction (PKB) 28.62 +0.0% +22.0%
Financials (IYF) 102.30 -0.9% +18.6%
Utilities (XLU) 48.72 +0.1% +18.6%
Water (PHO) 25.04 +0.7% +14.3%
Software (PSJ) 48.19 +0.2% +13.7%
Big Tech (QQQ) 120.39 -0.1% +9.6%
Consumer Svcs (IYC) 154.87 -0.4% +8.9%
Real Estate (IYR) 76.93 -1.1% +7.3%
Media (PBS) 26.56 +0.6% +8.1%
Retail (PMR) 38.29 +1.1% +7.0%
Health Care (IYH) 144.92 -0.4% -1.2%
Biotech (PBE) 40.85 +0.1% -18.0%
Alt. Energy (PBW) 3.81 +0.2% -19.6%