Dividend Growth Investing: Beyond the Yield (Part III)

Dividend Growth Investing: Beyond the Yield" explores the strategy of selecting stocks not just for their current dividend yield but for their potential to increase dividends over time. This article emphasizes the importance of looking at a company's long-term growth prospects, financial health, and history of dividend increases as indicators of sustainable income. It guides investors on how to build a portfolio that seeks to provide not only immediate income but also income growth, offering a pathway to outpace inflation and build wealth through compounding dividends.

STOCK INVESTING

2/24/20243 min read

Welcome to our Advanced Dividend Investment Strategies Series

Imagine an investment strategy that not only provides you with a steady stream of income but also grows that income over time, outpacing inflation and building your wealth in a truly compounding manner. Welcome to the world of dividend growth investing, a powerful approach that focuses on companies with the potential to increase their dividend payouts year after year. This isn't just about chasing the highest current yield; it's about investing in the future and watching your income grow exponentially.

The Concept of Dividend Growth Investing

Dividend growth investing is a strategy that prioritizes long-term income growth over immediate high yield. It involves investing in companies that have a history of consistently increasing their dividends, indicating not only financial health and stability but also a commitment to returning value to shareholders. Unlike high-yield investing, which focuses on the current dividend yield, dividend growth investing looks for the promise of future increases, offering a more sustainable and growing income stream.

Benefits of Dividend Growth Investing

  1. Compounding Growth: As dividends increase over time, reinvesting these growing payouts can significantly accelerate the compounding effect, leading to substantial portfolio growth.

  2. Inflation Hedge: Dividend growth often outpaces inflation, maintaining or increasing the purchasing power of your income over time.

  3. Lower Risk: Companies that consistently increase dividends are typically well-established and financially stable, reducing the risk compared to chasing high yields in less stable companies.

Criteria for Selecting Dividend Growth Stocks

  • Consistent Dividend Growth: Look for companies with a track record of raising dividends annually for a significant period, indicating reliability and financial strength.

  • Earnings Growth: Sustainable dividend growth is supported by earnings growth. Ensure the company's earnings are growing at a healthy pace.

  • Payout Ratio: A reasonable payout ratio (the percentage of earnings paid out as dividends) suggests that the company has room to grow dividends without sacrificing its financial health.

  • Financial Stability: Strong balance sheets and steady revenue streams are good indicators of a company's ability to sustain and increase dividends.

Detailed Example

Let's consider a hypothetical company, "TechGrow Inc.," which has increased its dividend annually for the past 10 years. Five years ago, TechGrow Inc. paid an annual dividend of $1.00 per share. Since then, it has increased its dividend by an average of 6% per year. If you had invested in TechGrow Inc. five years ago, here's how your dividend income would have grown, assuming you held 100 shares:

  • Year 1: $1.00 per share x 100 shares = $100

  • Year 2: $1.06 per share (6% increase) x 100 shares = $106

  • Year 5 (Current Year): $1.34 per share (cumulative 6% annual increase) x 100 shares = $134

This example illustrates not only the growth in annual income from dividends but also the potential for even greater income growth over longer periods, especially when reinvested dividends are considered.

Risks and Considerations

  • Market Risk: Like all investments, dividend growth stocks are subject to market fluctuations.

  • Performance Risk: Past dividend growth does not guarantee future increases; always perform due diligence.

Conclusion

Dividend growth investing offers a strategic approach for those seeking a balance between immediate income and long-term income growth. By focusing on companies with a track record of increasing dividends, investors can build a portfolio that not only provides a steady income stream but also the potential for that income to grow over time. This strategy requires patience and a long-term perspective but can be incredibly rewarding, offering a way to steadily increase your wealth and income potential without taking on excessive risk.

Read Part I Part II and Part IV Part V

Lastly, if you've decided that you would like to move forward and get started we have you covered. We recommend Webull to get started. We would start small and add more as you get comfortable. Get started by going to their signup page here.