Dividend Growth Rates

At a 20 percent growth rate, your dividend starts at $1.28 a share per year ($64 a year if you have 50 shares) and should grow to $ 2.65 a share in five years. By the time your retire, the growing dividends will provide a nice income, but it's the growth of capital where the real money is. Your capital should grow at the same rate as the dividend, so your $2,500 investment, with any luck, doubles in five years. Think about it, at 20% a year, it has to.
Year 1 $ 1.28 dividend $ 2,500 cost
Year 2 $ 1.54 dividend $ 3,000 price,most likely
Year 3 $ 1.84 dividend by year three, hopefully $ 3,600
Year 4 $ 2.21 dividend $ 4,350 price, if everything proceeds normally
Year 5 $ 2.65 dividend $ 5,230 ...with any luck...just about a double

Now you are earning close to 40% return on your initial investment.

Capital appreciation is not the sole source of investment returns: Where you can find it, income can be just as or even more important. The combination of capital growth and income is what constitutes total return, and this is what the investor should seek to maximize. Look at it this way: If you can get 10% annual capital appreciation from a stock that pays no dividend, or a 5% yield with 5% annual growth, which will leave you better off? On a pretax basis, the total
returns offered by these two stocks are identical.

Canadian Investors - Sin stock worth consideration

Rothmans Inc. (ROC-TSX)
Nov. 19 price: $24.95
Dividend: $1.40
Yield: 5.7 per cent

Toronto-based Rothmans, which makes Rothmans, Craven A and Benson & Hedges
brand cigarettes, provides investors with a high yield and has risen its dividend an average
of about 11 per cent annually over the past five years.

While its dividend hadn’t been touched since 2005, Rothmans announced a dividend raise of 16 per cent from $1.20 following a strong second-quarter earnings report on Oct. 26.

Just a few brief notes before diving right into the first companies profiled:

Dividends are not just for retirees--they're for anyone and everyone of all ages interested in earning high total returns over long periods of time.

I am a huge fan of dividends. I like seeing large sums of cash automatically deposited into my brokerage account every quarter. I like knowing that the businesses I own are generating real cash flow and sharing it directly with shareholders like me. I prefer to control my destiny and leave the mutual fund managers out of the equations. The management expense ratio will cost tens of thousands, if not hundreds of thousands of dollars at the end of the day. Think long term.

This isn't to say that growth through capital appreciation is off my radar. My personal
portfolio contains several small growth oriented companies that most people would not have heard
of. These are certainly not profiled here (unless I can locate one paying you a great dividend).

True tax must be considered. For most, the income received in tax deferred retirement accounts.

The dividend growth strategy required very little time, a few minutes a month...perhaps.
You are going to have to do it on your own, but it will be worth it. Temperament is key, and
the downfall of most investors who yearn to look at their portfolio daily and trade
in and out of stocks. RESIST the temptation and join the rest of us who receive our paychecks
via dividends.

At the bottom of each monthly report, you will find a scorecard. The number of interest is the
YIELD ON PURCHASE PRICE TODAY, i.e. your effective yield given the original purchase price.
This percentage will increase over time as the dividend payments increase, and conversely
decrease over time if dividend payments are cut.

Dividend Growth Criteria

THE THREE MOST IMPORTANT NUMBERS
FOR DIVIDEND GROWTH

1) Net Income

2) Depreciation and Amortization

3) Capital Expenditures


Dividend To Cash Flow Ratio

I like to refer to this as the DTCF Ratio

Accounting rules require companies to disclose their financial statements and the three numbers that
interest dividend investors (according to me would be as follows:

Net income (or alternatively Net Income Per Share) is equal to all revenues minus all expenses

Depreciation and Amortization

Capital Expenditures

Now for a "very brief" explanation:

Depreciation and Amortization is an expense category:

This expense category of is a non cash expense. Companies depreciate assets much like
the car you recently purchased. Over time, the assets a company collects lose their vale.
The accountants call this depreciation, which really means the assets are "used" and getting older over time. They deduct and amount every year from the revenues to reflect this depreciation, however the company does not disburse any cash for this accounting entry. It is simply that, an accounting entry.

Capital Expenditures - another fancy term in accounting parlance to explain new assets a company must purchase to either replace the used stuff, or keep up with new technologies. In simple terms, when your car gets old, you buy a new one. This is a capital expenditure in accounting terms. Capital expenditures are cash disbursements and can be VERY BIG
in certain companies.

Here are two simple examples:

Company WE SPEND CASH INC. in year 1:

Net Income in year 1= $ 0.90
Depreciation in year 1 = $ 0.50

Total cash flow available to shareholders n year 1: $ 1.40

Capital expenditures in year 1: $ 0.55

Cash Flow available for shareholders: $ 0.90 + $ 0.50 - $ 0.55 = $ 0.85

Dividend: $ 0.10

Dividend / Cash Flow

$ 0.10 / $ 0.85 = 15 percent

15 percent of the cash flow is used to pay dividends.

Company "WE SAVE CASH INC." in year 1:

Net Income in year 1= $ 0.90
Depreciation in year 1 = $ 0.50

Total cash flow available to shareholders: $ 1.40

Capital expenditures in year 1: $ 0.40

Cash Flow available for shareholders in year 1: $ 0.90 + $ .50 - $ 0.40 = $ 1.00

Dividend / Cash Flow

Dividend: $ .10

$ 0.10 / $ 1.00 = 10 percent

In this case, company XYZ is paying out 10 percent of their cash flow as dividends.

On the surface it would appear that 15 percent is better than 10 percent, but in this case,
that is not true. And the reason is very simple...... Company We Need Cash Inc. requires more money
to fund capital expenditures than company WE SAVE CASH INC. Company WE SAVE CASH INC. earns the same as company
WE SPEND CASH INC., but requires less capital. The result is that company WE SAVE CASH INC. will have an easier time
paying dividends, and an easier time "INCREASING" dividends, over time.

Let's assume both shares trade for $ 2.00 per share.
The Dividend Yield for both companies = $ 0.10 / $ 2.00 = 5 %
Consider the yield of 5% as the equivalent of an interest payment.

OVER TIME the company that can keep their dividend to cash flow ratio, as described above,
consistent or "LOWER", the better chance shareholders (you) will have receiving an ever increasing
dividend. In the case above an ever increasing dividend is crucial. If your initial yield is 5%, and the dividend
is increased in year 2 to perhaps $ 0.11, then your yield suddenly becomes 5.5% ($ 0.11 / $ 2.00).
OVER TIME, an ever increasing dividend increases your yield..... this is powerful income growth. Your
dividend checks (or in most cases - automatic deposits) just keep growing and growing.


A second interesting thing happens: Companies that have the ability to keep the DTCF ratio in check will more than likely be capable of increasing their long term earnings, end hence provide shareholders with capital gains (increased share price). OVER TIME, company WE SPEND CASH INC. will be worth less than company WE SAVE CASH INC., all other things being equal.

WE SPEND CASH INC. will generate more cash, pay ever increasing dividends, and also have more capital available to reinvest in the growth of the business.

OUR RATINGS CATEGORY

TIER 1: DTCF is historically decreasing over time while the dividends paid keeps increasing each year.

TIER 2: DTCF is historically constant over time dividends paid keeps increasing each year.

TIER 3: DTCF is historically increasing over time but dividends keep increasing each year.

TIER 4: DTCF is historically increasing over time but dividends keep constant each year.

TIER 5: DTCF is historically increasing over time and dividends falling.

TIER 1 and TIER 2 Ratings will generally offer the best opportunities to keep a growing dividend
as well as share appreciation. TIER 3 companies will require careful monitoring, however companies
with a strong franchise in TIER 3 would still be considered.

TIERS 4 & 5 are probably worth staying away from as the dividend could be at risk.