A great article that talks about dividend stocks. The main point of the article is to research the individual company when making a stock purchase. Why do dividends matter? Let's do the math

Focus on the companies, not the market

Consistently rising dividends must be reflected in the market. Rising dividend payments are incontestable proof that the underlying company is not only currently profitable but that its prospects for future profits are strong. Wall Street rewards profitable companies by driving their share prices higher.

The focus for investors, then, should be on the companies and not the market. And the underlying value in a company is in its dividend. Why are dividends and dividend increases so important? Let's answer that question with the following hypothetical scenario:

Take 1,000 shares of a $10 stock ($10,000) that pays a 50-cent annual dividend (5%, or $500 per year). Let's say both the share price and the dividend increase by 10% per year. In five years, the stock price is $16.11, giving the position a $16,110 market value. The dividend is 81 cents per share (a 8.1% yield on cost), and the annual dividend received has grown to $810.

In 10 years, the stock price is $25.94, the market value is $25,940, the dividend is $1.30 (13% yield on cost), and the annual dividend received is now $1,300.

"Nice hypothetical, Wright. How about the real world, though?" I am so glad you asked.

The five-year dividend-growth-rate average for Bank of America (BAC, news, msgs) is 13.13%. The current dividend is $2.56. If the past is prologue, the dividend for Bank of America should be about $4.72 in five years, which based on the recent price of $50 per share equates to a yield on cost of around 9.45%. Now consider that the five-year dividend-growth-rate average is 34.64% for McDonald’s (MCD, news, msgs), 33.41% for American International (AIG, news, msgs), 29.44% for Cardinal Health (CAH, news, msgs), 24.96% for Citigroup (C, news, msgs), 20.80% for Wal-Mart Stores (WMT, news, msgs) and 20.39% for Polaris Industries (PII, news, msgs). Are you starting to get the picture?

"But we're going into a recession," you say. Maybe, maybe not; and if we do, it isn't the end of the world. I've witnessed a lot of turmoil over the years, the crash of '87, the Asian currency flu of '97, the failure of Long Term Capital Management and the Russian default in '98, and of course, Sept. 11, 2001.

Each event created anxiety, each event had repercussions, but each event was survived, and all the companies listed above prospered. This too shall pass; opportunities abound.

The Div Guy owns shares of BAC and C at the time of this post