DaKini: A bit difficult to follow, but I will try.

A prosperous company, will pay out a dividend, or a share of the earnings to their shareholders. When that company trives and earns more money each year, they will pay out more money.

Say, company A earns $1 per share, or EPS. They decide they will pay some of it out to their shareholders, and decideds 50% is enough. Because they need some to reinvest themselves. So, they keep 50% and we recive 50% or $0,5.

Next year, the company has done well, and the years ahead looks ok, so they decide to keep paying 50% of their earnings, which now has increased with 10%. That gives a EPS, of $1,1. So, we recive 50% and they keeps 50% for reinvestment. So out take this year is $0,55 or a 10% increase in the dividend. This has beaten inflation ( somwhere around 1-5% depending on the country ), and increased our earnings alongside the company.

Since this started decades ago, and people needed to proctect their savings, companies tried to shield investors and retierees by increasing their dividend to atleast beat inflation.

In year 3, a bad year, when their earnings are down, say, only making $0,7, they will still increase their dividend, to shield investors from inflation but, at a cost of not keeping the same amount as shareholders. So we recive $0,55 x 5%, which is $0,577. But that only leaves $0,12 for the company. They are now paying out 82% of their Free cash flow, $0,577 / 0,7EPS. This is not viable in the long run, but if it where only a bad year, the EPS will increase again, giving them a chance to pay out more.

This insures that the company always, always tries to be as profitable as possible, so that they will never need to cut their dividend. Which is seen as a weakness, and scares away those seeking a inflation beating investment.

In Europe this is somwhat different. There, the investerors are rewarded when a company has a good year, and when there is a bad year, the investors recives less or nothing. Very few german companies pays out a increasing dividend each year.

But yes. If I invest $100 in a company that yields a 2,5% dividend, and earns more each year, they will try to increase the dividend. So with compounding interest ( the worlds 8th miracle, according to Einstein ) this increased dividend will in 10-15-20 years give more and more intrest on the initial investment. A 2,5% dividend, increasing with a flat 10% each year, will increase to 6,5% after 10 years.

A $100.000 investment at year 0, gives $2500

After 10 years: $6500.

After 15 years: $10400

After 20 years, $16820

You still have your $100.000 invested, recive $16000 - tax, each year, and can do whatever you want with it. Reinvested during your working years, will increase this amount substantively! Also, at the same time, the initial stock price will have risen, as well.

Piuuuh.. did I answer your question? :)