Invest Like Albert Einstein

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."

When buying dividend stocks, a high starting yield and high dividend growth rate can super-charge your long-term returns. As a personal example, in 2020 I bought 100 shares of AbbVie Inc. At the time, the stock yielded roughly 4% and was increasing its dividend by more than 10% annually.

Buying 100 shares cost me a little under $10,000. A fair amount of money. However, AbbVie kept raising its payouts. Five years later, my yield-on-cost has climbed above 10%.

Within another year or two, my yield-on-cost should grow to 12% or more.

Results like this are more common than many investors realize.

If you can find a high-yield stock that consistently raises its dividend by 7% or more each year, you’re well on your way to achieving an 8%, 9%, or even 10% yield-on-cost within a decade. And if the company pays special dividends or delivers double-digit increases, you’ll achieve these results even faster.

With this in mind, here are three high-yielders that grow their dividend by at least 7% each year…

1. American States Water Company ($AWR)

American States Water Company maintains the longest dividend growth streak in the United States. This stock has raised its dividend every year for 71 consecutive years. And despite its age, this firm continues to increase its dividend at a rate that outpaces inflation.

American States Water Company is a water utility provider that serves over 1 million customers across 10 different states.

Water utilities are some of the oldest and earliest “subscription-based services,” since customers pay monthly. A feature that has allowed American States Water Company to raise its dividend every year for more than 70 years while also maintaining a reasonably safe payout ratio.

American States Water Company currently trades at a price to earnings ratio of 21.64 while offering a 2.81% starting dividend yield that is backed by a 5-year compound annual dividend growth rate of 8.66% and protected by a payout ratio of just 56.23%.

This is a defensive stock with an above-average starting yield and strong dividend growth.

2. Old Republic International Corporation ($ORI)

Here’s a secret “high-yielder” that often pays double its listed dividend thanks to special, one-time distributions.

Old Republic International Corporation is an insurance company that writes specialty and title policies. The company has been in business for over 100 years, and Old Republic has paid uninterrupted dividends 84 years. Better yet, this firm has raised its payout every year for 44 consecutive years.

On top of this, Old Republic routinely pays special distributions.

Unfortunately, most investors are unaware of this. These one-time distributions are often ignored by stock screeners, which makes the listed yield and dividend growth rate look artificially low.

When it comes to valuation and quarterly dividends, Old Republic trades at a price to earnings ratio of 13.22. The company pays a 2.68% starting dividend yield backed by a 5-year compound annual dividend growth rate of 6.67% and protected by a payout ratio of just 34.19%. This is deceptive, however, because in boom times, Old Republic issues special distributions that boost the firm’s yield as high as 8%. If reinvested, these special payouts accelerate Old Republic’s dividend growth rate beyond the reported number.

The special dividends aren’t a yearly guarantee. But they do come frequently enough to warrant putting Old Republic International on this list.

3. New Jersey Resources Corporation ($NJR)

New Jersey Resources Corporation is a high-yield, high-growth utility company that trades at a relatively low valuation.

This firm is a regulated natural gas utility that has been in business for more than 100 years. New Jersey Resources has paid a dividend every quarter since 1952, and the company has raised its dividend every year for the past 30 years.

New Jersey Resources Corporation serves approximately 576,000 customers across six different New Jersey counties. The company also operates a clean energy segment that installs solar panels across multiple states. And, the firm owns NJR Midstream, a natural gas pipeline and storage business.

In terms of yield and growth, this is an appealing business.

New Jersey Resources Corporation pays a 4.22% starting yield that is backed by a 5-year compound annual dividend growth rate of 7.52%. The firm’s dividends are protected by a safe payout ratio of 55.47%. And, the company trades at a relatively low valuation with a price to earnings ratio of only 14.46.

An interesting high-yield, high-growth stock that still maintains a low payout ratio.

Conclusion

Dividend haters often ignore, or genuinely don’t understand, the power of compound interest. When a company consistently raises its dividend, your yield-on-cost rises too.

And if you reinvest your dividends, you accelerate this growth even faster.

Going back to AbbVie Inc., a quick look at any chart would show that this stock currently pays $6.92 per share. But long-term shareholders who have been reinvesting their payouts have steadily accumulated more shares using “house money.” Over time, those reinvested dividends might have bought you an extra 40, 50, or even 100 shares. Now, that initial $10,000 investment is generating $1,000+ in annual income.

The same principles apply for all of the stocks on today’s list.

You buy, you hold, you reinvest your dividend income. And pretty soon that combination of “house money” shares and annual raises see you collecting the big bucks.

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Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.