The power of dividend growth isn’t really a secret, but a lot of investors don’t realize just how powerful it is.
Most investors think of dividends as moderate payouts from staid stocks. But the best dividend growth stocks are anything but boring: they can grow by 20% or more per year, every year.
Investors don’t necessarily notice this growth though, because growing dividends are usually accompanied by a rising stock price (long-term). When dividends and price rise together, yield (the percentage of your investment you earn in dividends every year) often stays about the same.
How to find dividend growth stocks
The best dividend-paying stocks can help you reach a variety of investment goals, including protecting your wealth, generating income and reaping capital gains.
Dividend growth investors are primarily concerned with buying high-quality stocks that have the ability to raise their dividends over time. If your goals include price appreciation, regular income and rising dividends, you’re a dividend growth investor. Investors looking for these stocks should take a closer look at stocks with long histories of dividend growth. Specifically, there are two prestigious lists related to dividend history, that investors should focus on. First, there is the Dividend Aristocrats, a group of 57 stocks in the S&P 500 that have raised their dividends for at least 25 years.
There is a another list of stocks with even longer histories of dividend growth, called the Dividend Kings. The Dividend Kings have raised their dividends for at least 50 years in a row. There are fewer than 30 stocks on the list, which shows how difficult it is for a company to increase its dividend each year for five decades.
To harness the power of dividend growth, you have to find a stock with the potential for future dividend growth. Three factors determine a stock’s potential for dividend growth:
- Dividend history – The best dividend growth stocks make increasing dividends a priority in good years and bad, and you can easily check on that by looking at their history of dividend increases. If the company isn’t inclined to raise its dividend, it’s not going to happen.
- Cash flow – The most important factor is cash flow growth. If the money coming in isn’t increasing, the money going out can’t increase.
- Payout ratio – Also important is the company’s payout ratio. That’s the amount of free cash flow that they pay out as dividends. A lower payout ratio means more room for growth.
Dividends are fantastic wealth builders, especially when you reinvest them. Reinvesting dividends has a compounding effect on an investment, delivering jaw-dropping returns over time. Reinvested dividends buy more shares of stock. More shares of stock pay still more dividends. And if the dividends grow and the stock price appreciates, the returns can be astounding.
Find out more about dividend growth stocks and how to find the right ones for your portfolio. Download our free report, The Five Best Dividend Stocks to Buy Today.
What questions do you have about dividend growth stocks? Share your thoughts in the comments below.