I love to collect passive income. Right now, it provides me with additional money to invest. In the future, I plan to live on the passive income my portfolio produces.
I own many high-yielding dividend stocks. The highest yield in my portfolio currently belongs to Enterprise Products Partners (NYSE: EPD). My yield on cost is 10.9%, which is much higher than the master limited partnership's (MLP) current yield of 5.9% based on its recent trading price. Here's why I have such a high yield on my position and why it's important to look beyond a stock's current yield when investing for passive income.
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I started investing in Enterprise Products Partners nearly 20 years ago. I've steadily built up my position over the years. My cost basis is $20.55 per unit. At the current distribution rate, I'm earning a 10.9% yield on my cost basis, the highest in my portfolio.
That's not because I bought all my units when Enterprise Products Partners' yield was in the double digits. Its payout has averaged around 6% during my holding period, including when I bought my initial units. It has only traded in the double digits twice since I started my position, and while I added both times, most of my purchases have been closer to its historical average yield.
Instead, my high yield on cost is due almost entirely to dividend growth. Enterprise Products Partners has increased its distribution every year since its initial public offering in 1998. The MLP has grown its payout by nearly 130% since I bought my initial units almost two decades ago:
That growing payout has steadily increased the income yield on my cost basis.
It can be easy to get lured in by a stock's current yield. However, data from Ned Davis Research and Hartford Funds show that the better play is to focus on dividend growth rather than yield. They discovered that companies that increased their dividends delivered a much higher total return than those with no change in their dividend policy (10.2% average annual total return vs. 6.9%).
That has been the case with Enterprise Products Partners. The MLP has delivered a 12.1% annualized total return during my nearly two-decade holding period. I've benefited from its rising income stream and unit price, which have enabled me to grow my passive income and wealth over the years.
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