Friday, August 24, 2007

Royal Bank & the power of dividend growth

Today Royal Bank of Canada (RY) announced a 19% increase in earnings from the third quarter of last year. They also raised my pay (AKA their dividend) by 9% to $0.50, this has been a semi-annual raise. This reminds me of a phenomenon in dividend investing that I believe is extremely powerful and lucrative.

Probably the most powerful part of a dividend growth investment strategy is below. Check out this example of Royal Bank as of today:

Bought in May, 2006 Cost = $47 / share. Dividend at that time was $0.36 / share so the stock was yielding 3.1%

Since then they've raised their dividend from $0.36 to $0.50 (as of today)

The shares now trade at around $55 / share. So they yield 3.6%.

BUT THE ACTUAL YIELD THAT I AM RECEIVING ON MY INVESTMENT IS:

$0.50 (current dividend per share) x 4 / $47 (my investment per share) = 4.3%

These dividends are also getting reinvested, so that adds a whole other benefit to the strategy which employs a compounding effect.

9 comments:

FinancialJungle said...

Hey MG,

I finally initiated my RY position. Only 50 shares to start, because my portfolio is already packed with banks (Cdn and US).

Very exciting indeed.

FJ

FourPillars said...

Congrats on the raise!

I don't have any RY but it's on my watch list.

Mike

moneygardener said...

thanks for the comments..

Nurse B, 911 said...

My average yield for that portfolio has increased 8.43% since July 30th!!! Sure puts a smile on your face when you think how long it takes your money to double at that rate + its money in your pocket

Torbjorn said...

I like your page, dude. When i get to work I spend my first 30 mins with my coffee, reading some, checking up on my own, and staying calm in this volatile market. Even when I choose to ignore my portfolio, I like to keep up with other investing and working blogs.

In the case of your Poll question, what do you mean by Save? invest? RSP? probably not trade, that's much more a job - I guess it's whatever you want it to be.

Keep up the good work!

Anonymous said...

How do you get 4.3% from $0.5 over $47?

For example, 3 % of 100 is 3 and 3 % of 50 is 1.50.

MG said...

anon,

I neglected to point out that the $0.50 is a quarterly payment.

To obtain the annual yield you multiply by 4 so 2.0, then divided that by 47 = ~4.3%

Anonymous said...

I'm afraid your analysis is incorrect and may lead to erroneous decisions as to redeployment of your capital. Your yield calculation must be based on the current value of your holding, not the original investment. On a periodic basis, you must look at the returns available in the market and decide whether to liquidate your current holding and reinvest.

Assume you invested $100 in a stock with annual dividends on your purchased shares of $5, then you have a divident yield of 5%. If that stock's price goes to $200 and management do not increase the annual dividend amount, your yield is not 5% - it is 2.5%. Equally, if management DID increase the annual dividend amount so that your shares received not $5 but $10, then your dividend yield would remain at the original 5%. In this second case, you cannot say that your dividend yield has increased from 5% to 10% because you are tying up capital of $200, not your original $100, to achieve the $10 of dividend. Your analysis would ignore the opportunity cost of the increase in the value of your holding.

MG said...

Anon, I understand that completely and my post was not meant to convey that the stock is currently yielding 4.3%...