If you want to figure out how long it will take to double your money in an investment, you use the “Rule of 72.” But income investors can put this rule to work, too, to figure out just how quickly their dividends will pile up.
I’ll show you how – and I’ll show you five dividend stocks that are on pace to double their dividends in just seven years.
The Rule of 72 is just a simple equation you can use to project the amount of time it would take to double your investment money. The equation:
72 / compound annual interest rate = # of years to double your investment.
So let’s say the S&P 500 returns an average of 8% a year. 72 / 8 = 9. That means it should take about nine years for someone holding a market fund such as the SPDR S&P 500 ETF (NYSE:SPY) or Vanguard S&P 500 (NYSE:VOO) to double their money.
Obviously, I aim to do better.
But you can also use this equation to figure out how quickly your dividends should grow over time, which will help you figure out your eventual yield on cost.
For instance, say a stock yields just 3% now, but is on pace to double its dividend in just five years, you can essentially plan for a much healthier 6% yield on cost in a short amount of time. That would be an income play you and I could get behind!