I’m a big believer in dividend growth investing. Dividends are real; they can’t be faked or created with fraudulent accounting. Dividends and dividend growth rates provide an important indicator of the health and value of a company.
What is Dividend Growth Investing?
Dividend growth investing is the process of creating a diversified portfolio of stocks whose underlying companies have the ability to pay and grow their dividend for long periods of time.
Dividends are an important indicator of the value of a stock. A company that is able to consistently raise its dividend probably means they are consistently growing their earnings too. Dividend growth helps to identify well managed companies that have confidence in their future earnings.
Companies that raise their dividend year after year are usually the best companies. That is why the Dividend Value Builder uses Dividend Stock Lists to find great companies for further research.
Companies with stable business models, quality balance sheets, rising cash flow, and reasonable valuations are the best candidates for dividend growth investing portfolios. Here are 6 important advantages of dividend growth investing:
6 Advantages of Dividend Growth Investing
1. Get Paid to Wait
Dividends allow an investor to get “paid to wait”. Historically dividends have provided 43% of the S&P 500 total return. Dividends provide an ongoing return while waiting for capital appreciation.
2. Dividend Growth Compounding
The benefits of exponential growth are multiplied by growing dividends. This is because both the number of shares (from reinvestment) and the dividends per share are growing. The exponential power of dividend growth compounding can provide competitive returns regardless of whether the price of the stock increases in value or not.
3. Take Advantage of Bear Markets
Investors savvy enough to reinvest dividends during bear markets purchase more shares with the dividend while the prices are low rather than when the prices are high. Later, when prices recover, the return is actually enhanced by the temporary fall in the stock price. Reinvesting dividends and accumulating more shares during bear markets greatly boosts dividend growth investing returns.
4. Capital Preservation
Quality dividend paying companies are more mature and stable than the average company. These stocks usually hold up better in down markets than more speculative stocks. This is especially true when a value approach with margin of safety is used when selecting stocks.
Regular readers of this blog know I put the upmost premium on the concept of preservation of capital and asset allocation investing. Dividend growth investing is a key part of portfolio asset allocation management that emphasizes preserving your investment principal.
5. Create an Income Stream
Dividends provide a regular income stream. Most stocks pay a quarterly dividend, but a well constructed portfolio of dividend stocks can provide a consistent monthly income stream. You want to buy companies that have the ability to increase the dividend. It’s a mistake to focus only on yield.
6. Inflation Hedge
The big disadvantage of fixed income investments is the income stream doesn’t grow. Even a 3% inflation rate will destroy 50% of the buying power of your principal in just 24 years. Dividend growth stocks provide the ability to receive income that increases and maintain the purchasing power of your principal and income.
Dividend Growth Investing Strategy
The advantages of a dividend growth investing strategy make it an important part of portfolio management. Getting paid to wait, dividend growth compounding, taking advantage of bear markets, capital preservation, a regular income stream, and the ability to maintain purchasing power are all advantages of dividend growth investing strategies.
Discover, Evaluate, and Compare Dividend Stocks
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