Here’s how you can earn 10% of your investment back in dividends

Want to collect 10% of your investment back in dividends? There are stocks that are bringing in so much right now, but there is often significant risk involved in seeking out these types of investments. In general, stocks with such high yields either have unsustainable payout ratios or their stocks crash hard, perhaps because their core businesses are struggling.

Therefore, if your goal is to lock in 10% returns right now, this may be a risky strategy. A safer approach is to invest in dividend growth stocks. Over time, their increases will accumulate and your periodic dividend income will increase.

Best Dividend Growth Stock to Consider

When investing in a dividend stock, it’s important to look for one that increases its payouts over time. That doesn’t necessarily guarantee it will continue to increase dividends in the future, but it’s a great indication that the company’s management is willing to do so. Plus, it also suggests that the fundamentals of the business are strong enough to support such moves.

A dividend growth stock that could make earning 10% back in dividends a reality is a healthcare company and leading drugmaker AbbVie (ABBV -1.13%). Today it gives a yield of 3.7%. That’s not bad, and at this rate you’d need to invest just over $27,000 to earn $1,000 in annual dividend income.

But over the years, AbbVie has increased its payouts. The current quarterly dividend payment is $1.41, up 8.5% from the $1.30 it paid a year earlier. And compared to five years earlier, when it paid $0.64 each quarter, the dividend is up 120%, with a compound annual growth rate (CAGR) of 17%.

That tells investors the company’s recent round of raises has been slower than in the past. This may be common as businesses expand and choose to use more cash for growth purposes rather than dividends. And with the drugmaker’s best-selling drug, Humira, facing patent expiration next year, AbbVie certainly has plenty of incentive to work to strengthen its business however it can before that happens. This could mean a slower rate of dividend growth in the future, which in turn will affect how quickly your dividend income rises.

How long will it take for the dividend to be 10% of your investment?

The key to predicting how long it will take your dividend income to grow to your desired goal is estimating the dividend growth rate. If you earn $37 on every $1,000 invested in the company today (ie a 3.7% yield), then a 10% dividend would be $100. This means that the dividend will have to increase by 170% from where it is now.

At the five-year CAGR of 17% that AbbVie’s dividend averages, it will take more than six years of increases to reach that level. A more conservative estimate would use 8.5%, the rate of its most recent increase. Under this assumption, you expect about 12 years of growth for $37 in dividend income to turn into $100. And if you want to be even more conservative and assume that AbbVie will further delay its rate hikes, say an average of 5%, then the number of years you might have to wait is 20.

It can be difficult to estimate the rate of growth, especially when looking at such a long time frame. The longer the period, the less likely the high growth rate will be sustainable. But the bottom line remains the same: buying and holding shares of the highest dividend growth stocks can be a way to significantly increase your recurring income from stocks and a way to collect 10% or more of your initial investment back through dividends.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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