What is Dividend Growth?

Dividend growth can help you reach various investment goals, including protecting your wealth, generating income, and reaping capital gains.

Dividend growth stocks are those stocks that increase their earnings each year, have positive technical momentum, and increases their dividend payouts every year. To understand dividend growth, however, it’s important to understand what a dividend is. 

A dividend is a portion of earnings that the company pays to investors on a quarterly or yearly basis. Dividend investing grows your wealth in three ways:

1. Like with any stock, your portfolio increases as the price of the stock appreciates.
2. You will receive an income stream of dividend payments, which you can collect in cash or reinvest to further boost your holdings.
3. Many companies increase their dividends over time, providing an income stream that often outpaces inflation. 

Dividend growth investors are primarily concerned with buying high-quality stocks that can raise their dividends over time. The best dividend-paying stocks are high-quality, long-lived companies with predictable business models—they aren’t going to suddenly crash due to a lousy quarter or an adverse news event. 

And while it’s not true of every dividend stock, many of them are household names. They’re sitting in plain sight. They’ve been paying a dividend for decades, often growing that payment every year. 

Three factors determine a stock’s potential for dividend growth:

1. 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. 
2. 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.
3. 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.

To learn more about investing in dividend stocks, be sure to download your FREE copy of our report, Cabot’s 5 Best Dividend Stocks.