Up to date on June 14th, 2023 by Ben Reynolds

The snowball impact exhibits the facility of compounding.

While you push a small snowball down a hill, it constantly picks up snow. When it reaches the underside of the hill it’s a big snow boulder.

The snowball compounds throughout its journey down the hill. The larger it will get, the extra snow it packs on with every revolution. The snowball impact explains how small actions carried out over time can result in large outcomes.

In the identical manner, investing in high-quality dividend progress shares can generate giant quantities of dividend earnings over lengthy intervals of time. That’s as a result of dividend progress shares are likely to pay rising dividends yearly. After which you may reinvest these rising dividends to buy extra shares annually. This ends in a rise within the whole variety of shares you personal, in addition to a rise within the dividend per share, for a strong wealth compounding impact.

Traders on the lookout for the most effective dividend progress shares ought to take into account the Dividend Aristocrats, a bunch of 67 shares within the S&P 500 with 25+ consecutive years of dividend progress.

You may obtain an Excel spreadsheet of all 67 (with metrics that matter comparable to dividend yields and price-to-earnings ratios) by clicking the hyperlink beneath:

 

This text exhibits how you can harness the facility of the snowball impact to multiply your wealth and earnings many instances over.

It additionally contains 5 actual world examples of the ‘snowball impact’ shares which have compounded investor wealth.

Desk of Contents

You may immediately bounce to any particular part by clicking on the hyperlinks beneath:

The Energy of The Snowball Impact

Earlier than we focus on how you can harness the facility of the snowball impact we should perceive the facility of compounding.

The snowball metaphor visually exhibits the facility of compounding.

“Essentially the most highly effective pressure on the planet is compound curiosity”
– Attributed to Albert Einstein

Right here’s the facility of compound curiosity:

Think about you invested $1 that compounded at 1% a day. In 5 years your $1 would develop to over $77 million. You’ll be the richest particular person on the planet by 12 months 7.

Take into account that compounding is not a get wealthy fast scheme. It takes time – and plenty of it. There are not any investments that compound at 1% a day in the actual world.

The inventory market has compounded wealth (adjusting for inflation) at ~6.9% a 12 months over the long term. At this charge an funding within the inventory market has traditionally doubled each 10.4 years.

It takes extra time to compound wealth in the actual world – however that doesn’t make the precept of compounding any much less highly effective.

Take Warren Buffett for instance. Warren Buffett is price over $110 billion. Warren Buffett’s wealth comes from the great advantages of the snowball impact via time.

Warren Buffett compounded his wealth via a particular kind of funding.

Buffett invests in:

1. Shareholder-friendly companies
2. With sturdy aggressive benefits
3. Buying and selling at truthful or higher costs

“All there’s to investing is choosing good shares at good instances and staying with them so long as they continue to be good firms.”
– Warren Buffett

The following part of this text discusses how you can harness the facility of the snowball impact by investing in the identical kind of companies Warren Buffett does.

How You Can Harness The Snowball Impact

You may harness the facility of the snowball impact by investing in the identical kind of companies which have made Warren Buffett so rich over time. Particularly, firms with sturdy and sturdy aggressive benefits and shareholder pleasant managements, buying and selling at truthful or higher costs.

The excellent news is you don’t even must seek for these companies. There’s a record of 48 companies with 50+ years of consecutive dividend will increase referred to as the Dividend Kings record.

Nothing says ‘sturdy and sturdy aggressive benefits and shareholder pleasant administration’ like 50 or extra years of paying rising dividends in a row.

Coca-Cola (certainly one of Buffett’s largest investments) is a Dividend King. There are numerous different well-known shares within the Dividend Kings record, together with:

 

Chances are you’ll learn this and suppose: “these companies might have a historical past of success, however isn’t their run over”?

Traders have wasted great sums of cash chasing ‘the brand new scorching inventory’. It’s regular reliable outcomes that result in long-term wealth multiplication.

What would occur when you had invested in among the most well-known Dividend Kings in 1990?

The 7 instance companies beneath all had 25+ years of consecutive dividend will increase by the top of 1990. They have been well-known, blue-chip shares in 1990.

It didn’t take a genius to purchase and maintain them…

However the outcomes converse for themselves. 5 examples of the snowball impact in motion are beneath. All examples assume dividends have been reinvested.

Instance #1: The Coca-Cola Firm (KO)

Coca-Cola compounded investor wealth at 10.4% a 12 months (together with dividends) from 1991 via 2022. $1 invested in Coca-Cola in the beginning of 1991 could be price $23.62 by the top of 2022.

Coca-Cola was the most important soda model in the USA in 1990… And had a 98 12 months working historical past on the time. It was not a start-up.

Instance #2: Lowe’s Firms (LOW)

Lowe’s is the second-largest house enchancment retailer in the USA, behind solely The Residence Depot (HD). In 1991 Lowe’s was one of many largest house enchancment shops in the USA. It had a dividend historical past of over 25 consecutive years of will increase even then.

Investing in Lowe’s in the beginning of 1991 (32 years in the past) has labored out very nicely…

The corporate’s inventory has compounded (together with dividends) at an unimaginable 20.4% yearly over this time interval. $1 invested in Lowe’s in the beginning of 1991 would e price $379.74 on the finish of 2022.

Instance #3: Procter & Gamble (PG)

Procter & Gamble was simply as well-known in 1990 as it’s in the present day. The corporate has an iconic model portfolio with names like Tide, Bounty, Gillette, and Charmin (amongst many others).

The corporate was based in 1837. In 1990, Procter & Gamble had been round for 153 years… Not precisely a younger firm.

Nonetheless, long-term traders in Procter & Gamble have accomplished nicely. The inventory has produced 32-year annualized whole returns of 11.3% a 12 months. $1 invested in Procter & Gamble in the beginning of 1991 could be price $31.08 by the top of 2022.

Instance #4: Colgate-Palmolive (CL)

Colgate-Palmolive traces its historical past again to 1806. Each the Colgate and Palmolive manufacturers are simply acknowledged.

Along with these manufacturers, Colgate-Palmolive owns the Velocity Stick, Tender Cleaning soap, and Hill’s manufacturers (amongst many others).

Colgate-Palmolive has paid dividends since 1893. The corporate has paid rising dividends for over 50 consecutive years. In 1991 the corporate had a streak of 28 consecutive dividend will increase.

How did 1991 traders do? Colgate-Palmolive generated a compound annual returns of 11.7% throughout this 32-year interval. $1 invested in Colgate-Palmolive in the beginning of 1991 could be price $32.64 by the top of 2022.

Instance #5: Johnson & Johnson (JNJ)

Johnson & Johnson is among the most secure companies on the planet. This stability is mirrored in Johnson & Johnson’s lengthy historical past of dividend funds to shareholders. This ‘gradual and regular’ enterprise has been a boon for shareholders over the long-run.

The corporate generated compound whole returns of 12.4% a 12 months for shareholders in the course of the 1991 via 2022 time interval. $1 invested in Johnson & Johnson could be price $42.41.

The corporate’s low inventory value beta and volatility solely provides to its enchantment. Traders have traditionally generated glorious returns with Johnson & Johnson inventory with out as many gut-wrenching ups and downs as in comparison with different shares.

Snowball-Impact Shares For The Subsequent 25 Years

All 5 examples above trounced the market regardless of being nicely established companies with lengthy dividend histories.

However…

What shares would be the subsequent snowball impact compounders?

There’s no must reinvent the wheel. Anybody holding the serial compounders above ought to proceed to take action.

For these trying to enter into new positions in snowball impact shares ought to search for the next:

1. Above common dividend yield
2. Beneath common price-to-earnings ratio
3. Lengthy dividend historical past

The most important constraint of the three is the lengthy dividend historical past. We’ll begin by choosing solely from shares with 25+ years of rising dividends.

Out of those lengthy dividend historical past shares, we are going to display screen for:

1. A dividend yield above the S&P 500’s 1.6% yield
2. A price-to-earnings beneath the S&P 500’s ratio long-term common of 16.0

We’ll then type these by anticipated whole return. Complete return is the anticipated earnings-per-share progress charge, plus the present dividend yield, in addition to the online affect of any constructive or destructive adjustments within the price-to-earnings a number of.

The ten highest anticipated whole return shares with 25+ years of rising dividends, a dividend yield above 1.60%, and a price-to-earnings ratio (utilizing information from Certain Evaluation), are listed beneath:

1. Phone & Information Techniques (TDS) | Anticipated whole return of 20.0%
2. MDU Sources (MDU) | Anticipated whole return of 18.3%
3. Arrow Monetary (AROW) | Anticipated whole return of 18.1%
4. 3M Firm (MMM) | Anticipated whole return of 16.7%
5. Sonoco Merchandise (SON) | Anticipated whole return of 16.6%
6. UGI Corp. (UGI) | Anticipated whole return of 16.2%
7. Chesapeake Monetary | Anticipated whole return of 16.1%
8. Walgreens Boots Alliance (WBA) | Anticipated whole return of 15.9%
9. Norwood Monetary (NWFL) | Anticipated whole return of 15.4%
10. Westamerica Bancorporation (WABC) | Anticipated whole return of 15.1%

The ten shares listed above greatest match the factors to greatest benefit from the snowball impact.

‘Snowball shares’ have sturdy aggressive edges. Proof of their aggressive benefits is seen by their lengthy working historical past and constant dividend will increase.

Lengthy-term investing in nice companies with shareholder-friendly managements at truthful or higher costs will very probably produce compound wealth good points over time.

Associated: The video beneath discusses long-term investing and wealth creation.

Bear in mind the snowball impact when selecting your investments.

Different Dividend Lists

The Dividend Aristocrats record is just not the one approach to shortly display screen for shares that commonly pay rising dividends.