Although many companies pay modest dividends today, only 2 percent or 3 percent per year, those dividends can grow. Suppose, for example, you invest $10,000 in a bank stock that yields 3 percent. You’d collect $300 in annual dividends.
If the bank increases its profits over the years, dividends may increase. Instead of receiving $300 per year, you might receive $330, then $360, etc. Before too many years, you could be receiving $500 a year, which would be 5 percent of your original investment.
In fact, many companies have a history of increasing dividend payments to investors, year after year. Dividend-paying stocks have some additional advantages:
Low taxes. Under current law (at least through 2008), stock dividends will be taxed at only 15 percent, a much lower rate than in the past.
Chance for stock market gains. Companies that pay increasing dividends tend to be well-managed, with rising profits. Over time, such companies have enjoyed higher stock prices as well as dividends.