Given enough time, you can earn substantial wealth from compound interest on decent returns on your investments. What’s a good return on investment? You can use market returns as a gauge. For example, since 2003, the Canadian stock market return (using the iShares S&P/TSX 60 Index ETF as a proxy) has grown at a compound annual growth rate (CAGR) of approximately 8.6% (According to the rule of 72, investors would have doubled their money in about 8.4 years.).
Therefore, stocks that have beaten this return in the period could be a good investment. For example, Bank of Montreal (TSX:BMO) has delivered annual returns of about 9.6% in this timeframe. In fact, the stock is down about 17% in the last 12 months.
The weakness in the dividend stock could be an excellent buying opportunity for long-term investment. This is especially so since the big Canadian bank stock offers a higher dividend yield than the market. Assuming this dividend is safe (which I believe it is), investors can get more stable returns from BMO stock, which relies less on price appreciation than the stock market for returns.
The power of compound interest
Let’s take a look at BMO’s historical results for reference. Over the past decade, the bank increased its adjusted earnings per share (EPS) at a CAGR of 8.2% and dividend per share at a CAGR of 6.2%. Its 10-year total returns were roughly 10.2% per year (i.e., price appreciation of 7.4% and 2.8% from dividends annually). In other words, its dividend payments contributed to more than 27% of total returns.
At writing, BMO stock offers a fabulous dividend yield of 5.18%, which is higher than the 4.8% yield 10 years ago. Investing $10,000 today would make $518 in passive income annually. Assuming it’s able to grow its adjusted EPS 6% and dividend per share by 5% annually, and the stock appreciates 5% per year, an initial $10,000 investment will grow to about $16,289 in 10 years.
If the dividend yield remained at 5.18%, the stake would earn close to $844 in passive income annually (up almost 63% from $518). So, it would be a yield on cost of 8.4%. In other words, investors would earn north of 8.4% every year from dividends alone from then on assuming the stock increased its dividend over time.
How to fuel your wealth creation
While getting solid returns on your investments over time will make you wealthier, as shown in the example above, there are ways you can fuel faster wealth creation. You can reinvest your dividends for more shares in quality businesses. Additionally, you can regularly save and invest. For instance, you can invest $1,000 in your best stock idea every month or every few months. Just remember to spread your risk across a diversified portfolio.
Investor takeaway
It’s always the hardest to start something. It might not seem like much to make $518 per year in passive income on an initial investment of $10,000. However, slow and steady wins the race. Keep saving and investing regularly. If you invest in a basket of quality dividend-growth stocks, you will only make more and more passive income from your portfolio. Over time, the $518 per year could turn into $5,000.
Keep track of the growing dividend income per year you’re earning from your portfolio to encourage yourself in this lifelong journey. The increasing income may be from new investments from your regular savings or dividend increases from your holdings.
Before you consider Bank of Montreal, you’ll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in May 2023… and Bank of Montreal wasn’t on the list.
The online investing service they’ve run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 23 percentage points. And right now, they think there are 5 stocks that are better buys.
Fool contributor Kay Ng has positions in Bank of Montreal. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
