What is Dividend Growth Investing?
How can you make money investing in dividend growth stocks?
What are the pros and cons?
In this article, I will break down the notion of Dividend Growth Investing so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let me explain to you what dividend growth investing means and why it’s important!
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Table of Contents
What Is Dividend Growth Investing
Dividend growth investing is a type of investment strategy where the dividend growth investor buys shares in companies that pay dividends regularly.
In other words, if you buy shares in a company that is able to generate more revenues year-over-year and, thus, increase the dividends they pay, you have a good dividend growth stock.
The objective of the dividend growth investor is to generate returns by purchasing dividend stocks where he or she can earn a steady stream of cash flow by holding on to the shares and eventually earning capital gains by selling the shares at a higher price.
Dividend Growth Investing Strategy
There are different ways you can generate a return by investing in dividend-paying stocks in such a way that you grow your portfolio over time.
Let’s look at the main strategies adopted by dividend growth investors.
One of the most important strategies in generating returns through growth investing in dividends is to ensure you buy different quality stocks that pay dividends.
In fact, not all dividend paying stocks are made equal.
You need to find a company that is able to pay out dividends to its shareholders on a regular basis and where the dividends grow at a rate exceeding the rate of inflation.
Typically, if you are looking to invest in such a way that you intend to generate high returns through dividend growth investing, you must invest long-term.
The longer you hold on to your investment position and provided you reinvest your dividends, the more you can take advantage of the power of compounding returns.
A long-term investing strategy will also help you take advantage of the deferred taxes where your capital will work for you.
Just like any other sound investing strategy, a dividend growth investor portfolio is well diversified in dividend paying stocks.
To ensure you mitigate your investment risk, you should purchase shares in companies paying dividends in different industries and sectors.
As such, you reduce your risk of being exposed too heavily to one or a few companies or to a particular industry or sector.
As part of an investment diversification strategy, you can consider buying shares locally and internationally in well-known and established dividend stocks.
Your dividend growth investment portfolio should be composed of companies that have strong fundamentals and who produce growing revenues.
If your dividend paying stock is able to generate more returns year-over-year, you are likely to see an increase in the dividends that are paid out to you.
As such, the more your dividend payments grow over time, the more investment returns you can generate simply by holding on to your investment.
Dividend Growth Investor Considerations
As a dividend growth investor, what are the main elements of dividend growth investing that you should know about?
Cash Flow Net Present Value
One of the aspects that a dividend growth investor may look at is the net present value of all the cash flows expected to be received over time.
In other words, a company that pays a higher dividend cash flow to its shareholders will appear to be more attractive than a company that pays less.
For instance, a stock that has a low dividend yield as of today but is expected to rapidly grow over time and increase dividends will be more attractive than a stock with a higher dividend yield today but with little growth over time.
Company Revenues And Growth
A successful investor does not necessarily look at investing in the company offering the highest dividend yield.
True dividend growth investors look for companies that have strong revenues and demonstrated growth potential.
Would you prefer investing in a company that is losing money but has a high dividend yield compared to a company with growing revenues and a lower dividend yield?
In fact, the better investment approach is to invest in a company that may offer you less in cash dividend payments but has the potential to pay growing dividends long-term.
Investing in growth dividend stocks is a great strategy to earn passive income that will potentially grow over time.
Dividend income coming from qualified dividends will not be taxed as much as income generated through capital gains.
Although every investor’s tax situation is different, qualified dividends will be taxed at a lower capital gains rate than ordinary dividends.
Every dividend growth investor will have his or her own unique strategy and investment time horizon.
Generally, a growth strategy is effective when the investment time horizon is long.
The main objective of buying dividend growth stocks is to keep them long-term and collect the growing amounts of dividends paid over time.
If the stock fundamentals remain strong over time, technically there may be no reason for an investor to sell a quality dividend-paying stock.
The more you can keep your investment, the more you can expect to see returns over time.
Dividend Yield Expectations
How do you know that you are getting the right dividend yield from your investment?
Even though there’s no right or wrong answer relating to dividend yields, you can look at comparable stocks in the industry to see if a company’s dividend yield is on par with its peers, higher, or lower.
If you have invested in a portfolio of dividend stocks, you can compare your overall dividend yield to dividend stock ETFs to get a better sense of where your portfolio is situated.
Dividend Growth Investing Pros And Cons
What are the advantages and disadvantages of investing in dividend growth stocks?
Dividend Growth Investing Advantages
There are several key benefits in investing in dividend growth stocks:
- Dividends are a major source of long-term market returns
- Dividend growth stocks have historically outperformed the stock market
- Dividend growth stocks tend to be safer investments
- A long-term investment horizon protects the investor from emotional or rash investing
- You can earn a steady cash flow by holding on to the stock
- If you reinvest your dividends, you take advantage of compounding returns
Dividend Growth Investing Disadvantages
Here are some of the main disadvantages of investing in dividend growth stocks:
- You may focus on dividend yield and forget about other investment parameters such as dividend payout ratio, dividend coverage ratio, company growth rate
- You may focus too heavily on one stock that can potentially go bankrupt if they do not stay relevant in the market
- If interest rates go up, the value of your stocks will decline
- Investing in a company with a high dividend yield may actually be risky as the company may be losing money or has seen a decline in the stock price
- You will lose out on interesting returns by investing in growth stocks that don’t pay dividends if you put all your money in dividend growth stocks
Investing In Dividend Growth Takeaways
So, there you have it folks!
What is dividend growth investing?
Dividend growth investing is a type of investment strategy where you buy stocks that consistently pay dividends and who have been able to increase their dividends over time.
The idea here is to generate passive income through the investment in dividend stocks and where you would expect your dividend cash flow to increase over time.
A growth investor will generally invest in a portfolio of dividend paying stocks in different sectors and industries and will hold on to those stocks for a long time.
The dividend growth investing returns will be more and more interesting the longer you keep the stock and collect dividend cash payments.
There are many investing strategies out there and the dividend growth strategy is one of my personal favorite.
I have quality dividend stocks in my own portfolio that has generated consistent and fully passive income that I reinvest for maximum growth.
If you want to get started, be sure to get yourself a good brokerage account or investing platform so you can build a dividend investing portfolio with little to no fees or commission.
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Dividend Growth Investing Summary
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