Tuesday, February 21, 2012

Payback Period

Another good thing to look at is the payback period which is how long it will take for the total dividends you've received to surpass the original investment amount. For the purposes of this exercise I've assumed a $5,000 initial investment. The stock will grow at 5% per annum. The dividends will grow at the following rates for 10 years and then 5% per year in perpetuity.

Original YOC and Dividend Growth Rates
Original YOCAnnual Dividend Growth Rate

*The 6% YOC will grow at 3% for the whole period.

The quickest to payback the initial investment is the 6% YOC with the 3% growth rate right at year 10. The slowest which I expected was the 1.5% YOC with the 13% growth rate. I expected it to take longer to payback but not year 18. I was kind of surprised at how long it would for the 4% YOC to surpass the 6% in total dividends received. It won't pass it until year 20 which shocked me. But after that point the 4% YOC takes off and ends up paying over $8,000 extra in dividends for the 30 year period.

From looking at the above chart it seems like the best thing is the 3% or 4% if you have a long time horizon. It will maximize the income later if you have the time to continuously reinvest dividends for 30 years plus your payback period is only slightly longer than the 6% YOC with 3% growth.

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