My Investing Rules #2

My second investing rule is to always consider the dividend yield of a stock.  Dividends are a company's way of sharing its profits with shareholders.  Another way to look at it is that the company  is paying the shareholder to hold its shares.

As an example I will use Exelon (EXC) to demonstrate the great return you could receive only from dividends.

Exelon's dividend history can be seen here:  http://financials.morningstar.com/ratios/r.html?t=EXC®ion=USA&culture=en-us

Exelon's dividend has increased from $.88 a share in 2002 to $2.10 a share in 2009.  So, I think you can make the assumption that Exelon will, on average, increase its dividend year over year.

Now, let's look at its current projected yield, which is 4.93% at its current price of $42.59 per share.

4.93% return over one year only from a dividend is great, especially from a great company with a lot of upside like Exelon.

Let's say you buy a $2,000 position in Exelon through 4 separate buys of $500 worth of EXC stock.

Now here are the possible purchases.

12 shares at $43.00 = $516 + $7 commission = $523
12 shares at $42.50 = $510 + $7 commission = $517
12 shares at $41.50 = $498 + $7 commission = $505
12 shares at $44.00 = $528 + $7 commission = $535

So, you end up buying 48 shares of EXC for a total of $2080.

In the following calculations we are going to assume that the price of EXC will not go up or down over the long-term.  This means that the volatile ups and downs of the price will not change too dramatically.

We are going to be very conservative on this calculation by saying that the dividend will not go up from $2.10 per share even though based on EXC's dividend history it will go up year over year.

Here is the calculation:

10 year's of dividend payments will equal $1008.  This is only from the $2.10 per share dividend.

So, after 10 years your investment would increase from $2080 to $3088.  A gain of 48.5% or 4.85% per year.

It is easy to see why dividend paying stocks are so popular in 401k(s), IRAs, and portfolios of low-risk individuals such as those close to retirement.

Here are my favorite long-term dividend plays:  EXC, JNJ, MCD, VFC, AZN, VZ