It’s one of the most important concepts in income investing — yet it doesn’t get addressed nearly enough.

Today, I want to change that. Because once you understand the power of this concept, it may change the way you think about dividends forever. 

Calculating a security’s current yield isn’t hard. You take its total annual dividend payments, divide that by its current price and multiply by 100.

Simple enough, right?

Let’s take a look at one of the long-time holdings in my premium newsletter, The Daily Paycheck, to see this in action.

Magellan Midstream Partners (NYSE: MMP) is a master limited partnership (MLP) that currently pays a quarterly dividend of $0.74 per unit.

Today, gas prices are 42% cheaper on average than they were a year ago. That means Americans are on pace to spend $100 billion less at the pump in 2015.

#-ad_banner-#Now let’s do the math…

MMP’s Annual Dividend: 4 X $0.74 = $2.96

MMP’s Current Price: $69.68

MMP’s Current Yield: ($2.96/$69.68) = 4.2%

Now, I picked MMP as an example for a reason. It perfectly illustrates the point I want to make in today’s essay.

You see, some income investors turn their noses up at yields below 5%. As such, you might be tempted to look at MMP’s yield today and decide to search elsewhere.

But turning away a security like MMP just because the yield isn’t appealing today would be a huge mistake.

Remember: higher yielding securities usually come with higher risks. If you see a security yielding 7%, 8%, 10% or more… there’s often a reason for it.

There is a way, however, to get higher yields from lower-yielding, lower-risk securities. All you need is the right security and a little time.

For instance, right now I’m earning a 14.6% yield from MMP.

How is this possible? Let me show you…

Yield On Cost: A Fast-Growing Dividend’s Gift That Keeps On Giving
When I bought MMP back in February 2010 for The Daily Paycheck newsletter, its quarterly dividend was only $0.355 per unit. As you can see in the chart below, MMP has raised its dividend 108.5% since then.

​

So if you bought 100 units of MMP back when I did, you could expect to earn $1.42 per unit a year, or a total of $142 annually. Today, those same units are paying $2.96 per unit, or a total of $296 in income annually.

Back then, I was able to buy my MMP units for $20.32. So my yield — based on my original cost — is $2.96/$20.32 = 14.6%.

I’m not taking on any more risk than any other investor who is buying MMP today. But I am getting more than three times the yield they’re getting — based on the cost of my original investment.

Current yield is just a snapshot in time. It fluctuates every second of the trading day as the price of a security changes. But if you want your dividend income to grow as fast — or faster — than your expenses in retirement, you want a security that can grow its yield on cost over time. And to do that, you want to look for securities with a good track record for dividend growth.

I specifically bought MMP because it had a great reputation for raising its dividend. Since its IPO in 2001, MMP has raised its quarterly dividend 53 times, increasing its initial dividend rate by 464%.

When I’m researching a security with fast dividend growth to add to my Daily Paycheck portfolio, I look at more than the current yield. So should you. I don’t want to overlook the next security that could deliver a 108.5% increase in dividend income — just as MMP has done for me and my subscribers.

It’s a simple concept, but it gets lost on income investors all too often. And it’s the key to avoiding the sorts of high-yield traps most investors fall into and uncovering the best steady dividend growers on the market.

P.S. My publisher calls it “the craziest investment decision” he ever made. But it’s paying off — in the form of 410 dividend paychecks last year. And he’s not alone. Thousands of investors are taking advantage of my Daily Paycheck Retirement System to collect hundreds, even thousands of dollars a month in extra income — simply by investing in the kinds of safe, reliable dividend payers I recommend each month in my premium newsletter, The Daily Paycheck… To learn more about me and how my system could deliver regular dividend paychecks to you each month, simply follow this link.