The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Carla Pasternak
NEW YORK (
) -- As income investors, we can get caught up in yields almost to a fault. But there is something else you should be studying that could make just as big a difference to your long-term returns: dividend growth.
That's because dividend growth can make even lower-yielding stocks into big income producers over time. Take a look below at the income streams from a stock yielding 7% but not growing dividends, versus a 5% yielder that hikes payments an average of 10% a year in seven years. If you held 1,000 shares trading at a $10 share price, then here is the income stream each would produce during one year:
In just five years, that 5% yield would actually be worth more than the 7% yield. And just two years later, your income stream would grow to be 27% more than the stock yielding 7%. Keep in mind, this doesn't take into account rising share prices. If both yields stayed the same, then the share price of the 5% yielder would have to grow to $17.72 -- a 77% gain.
Buying stocks that increase dividends allows you to take advantage of one of the most powerful tools in the investors' arsenal -- the wealth-building effect of compounding. And consistent dividend growth is like jet fuel for the compounding engine.