The Magic of Dividend Growth Investing

Using the Dividend Growth Investing strategy, you are able to relax, maybe drink a beer, and wait for your money to start coming in.  This is a long-term investing strategy where the longer you hold the dividend stock, the more your investment is going to pay off.

The premise behind the dividend growth strategy is pretty straightforward.  You purchase a stock that has a history of increasing their dividend yield every year.  Then, you hold onto that stock for the foreseeable future.  The longer you hold onto the stock, the more you profit from the dividend, and you get to keep the stock’s intrinsic value.  There are potential drawbacks, especially where there are very high yield dividend stocks.  The payout ratio of earning to dividend payouts should not be too high or the stock could be losing value to keep paying out its dividends to investors.  I will explain that more later.


Raising the Dividend

A company that can grow its dividend year after year is probably in a healthy spot strategically.  The company probably has increasing earnings if they are raising the dividend every year.  This consistent dividend growth is often a good way to select a company who’s stock will likely continue to steadily increase with time.  Companies that grow their dividend are usually the best to invest in for the long term because increase in value over time through both the dividends and the stock value increases.

Typically, companies that are still in the growing stages typically do not have dividends, or if they do they are usually not high yield dividends.  For example, Google and Amazon do not currently provide dividends to their investors.  Instead, they choose to channel all their earnings into the growth of the companies.  On the other hand, more mature companies that have put their substantial growth phase behind them choose to impart some of their earnings to their investors through dividends.

Growing your income stream over time through purchasing dividends can be a huge positive gain towards achieving financial freedom.  Every year, the dividends increase is more money directly sent to you, the investor.  On top of the increase in dividend, you get the increase in value of the stock too.  This can be very beneficial, and if you pick a good company to buy your dividend growth stock from, like a Dividend Aristocrat, then you can ensure more gains next year.


Dividend Aristocrats

Dividend Aristocrats are companies in the S&P 500 that have consistently increased the dividends being paid to its shareholders for over 25 years, which also meet certain market capitalization and liquidity requirements.  The dividends must grow each of those 25 years to qualify the stock as a Dividend Aristocrat.  This consistent increase in dividends demonstrates the stock’s power and ability to rise above their competitors.  These are proven, long-term, winning stocks.  This track record of dividend increases makes them a safer bet than most other companies on the market.

There are currently 53 Dividend Aristocrats.  With the Aristocrats, you want to try to buy the company’s stock when it is at a discount.  Buying an Aristocrat at a discount is difficult because they often trade at high valuations.  However, if you can find a value play in an Aristocrat, then you can hold the stock and make money for decades to come.

Examples include:  Medtronic (MDT), Pepsi Company (PEP), Johnson & Johnson (JNJ), and AT&T (T).  These are all stocks that have been around a long time and have a proven track record of paying out increasing dividends year after year.

Some believe that Dividend Aristocrats make the finest stocks for a Dividend Growth Investor because of their proven track record and long-term growth outlook.  That preference is for each individual to determine.


Dividend Growth Companies Can Be Targets of Acquisition

To start, a merger is when a company buys another company.  There are many different ways mergers can occur.  It can be a friendly merger or a hostile takeover.  The company buying the other company can keep their name or take on the bought company’s name.  Mergers and acquisitions is such a complex area of law that multiple law school classes are taught on the subject, and the second most prestigious law firm in New York specializes in it (Wachtell, Lipton, Rosen & Katz).  Now on to the financial aspects…

Companies looking to spend down their excess cash reserves can look to purchasing other companies to gain new channels of revenue rather than expanding their current channels or starting the new revenue channel from scratch.  In fact, companies that grow their dividend are typically showing how great their business is improving year-after-year.  This means that it is likely to continue booming and is a good investment for the buying company.  Larger companies that have too much capital can utilize the extra capital to buy the profitable company (which is easy to see as their dividend keeps increasing yearly).  If you own part of the dividend grower, then you can likely get a good payday (not the candy bar… Well, you can go buy some Payday candy bars after).

A company buying another company will usually give a merger offer price on the Being-Bought company in excess of the share price, which will increase the share value.  Another option is getting stock exchanged for the buying company’s stock.  In most situations, if you own the shares of the company being purchased then you are making money on the merger deal.  We want to own a company that is being bought.  Let’s sell out!


Warren Buffet Does It

I know it is a weird argument, but if The Oracle of Omaha does it, then it’s probably a good thing to do.  Warren Buffet loved Coca-Cola (“KO”) because of its impressive dividend growth that furthered its valuation too.  KO has provided dividends since the 1920s and the dividend has grown every year for over 50 years.  KO had over a 9% increase in dividends every year since starting, which has resulted to a $1.40 dividend today.  KO may not be as great an investment today (its payout ratio is too high to support much future growth), but investors are always looking for the next Coca-Cola to put their money in and let it ride.


You Made It To The Finish!

Dividend growth investing is a great way to build a portfolio of stocks that will pay you more and more every year.  If you are able to get those stocks when they are on a discount, then their payout will grow even faster compared to your initial buy-in.  This investing strategy is for long-term investing.  Dividend growth investing is for holding your stock for years and accumulating the dividends of the stock to purchase more.  DRIP is an acronym that stands for Dividend ReInvestment Plan, which purchases partial shares of the paying company the dividends.  DRIP is the best way to accomplish this strategy, but some platforms do not support DRIP yet (*cough* Robinhood and Webull *cough*), however, a decent way to perform DRIP yourself is to add currency to the account and purchase an additional share each time you do not have enough money to buy into a dividend stock.

I hope you have enjoyed this article, please share and introduce your friends to a new way of investing (or at least a new site). Thanks!

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