This is a guest post by Mike, aka The Dividend Guy. He authors The Dividend Guy Blog since 2010 and manages portfolios at DividendStocks Rock. He is a passionate investor.
If you read Dividend Growth Investor’s blog, you already know how dividend investing is a powerful investing strategy. In fact, for the past 85 years, dividend stocks have contributed 43% of the total S&P500 annualized returns.
Source: JPMorgan
Numbers are even more impressive considering the period between 1990 and 2012:
Therefore, this investing strategy doesn’t only generate a constant income stream but it also performs well over time. The secret behind the whole strategy is a simple concept called dividend growth. By building a 3%+ dividend yield portfolio with an overall annual dividend increase of 2-3% minimum, you are also assured to beat inflation over the long haul. In other words, your portfolio doesn’t only generate a 3% dividend yield today but your payout will grow faster than the rate of inflation.
The following graph shows you the DIS and JNJ stock prices and dividend growth in percentages over the past 10 years. As you can see, an aggressive dividend growth strategy leads to a higher stock price (DIS) while a more reasonable but consistent dividend growth will ensure a steady stock price increase. In both situations, shareholders have been pleased with their results:
This is mainly why dividend growth is at the center of my investing strategy; because it can become the engine of both stock prices and payout increases.
If There is One Metric; It’s Called Dividend Growth
Beyond the dividend investing strategy and the dividend yield, there is dividend growth. To be honest, the dividend yield doesn’t matter much to me. I even picked tocks with yields as low as 1% such as Disney (DIS) and Apple (AAPL) for example. What really caught my attention is management’s will to increase their payout year after year. Here’s an interesting quote from Saturna Capital:
“Indeed, dividend growth has been a much larger determinant of equity returns in this new era of low benchmark rates and higher levels of uncertainty.”
In other words; if you can find a company that is continuously increasing its payout and shows metrics ensuring dividend growth sustainability, you just identified an over performing stock for the years to come.
Many great finance research articles have covered dividend investing. The impact of a dividend increase on a stock price is also very powerful. Aharony & Swary (source) has proven that an increase in dividend usually generates an increase in the price stock of 2% on average. On the other hand, Healy and Palepu (source) has proven that a dividend cut will contribute to drop the stock price by over 9.5% on average. This is why the past, but also the future dividend growth perspectives are very important when determining the choice of a stock in your portfolio.
At Dividend Stocks Rock (DSR), I look at dividend growth over 3 and 5 years. I ensure both metrics are positive to ensure that management is dedicated to returning more wealth to investors over time. This is also a great indicator of management’s confidence in the company’s future. As previously mentioned, I also have to consider other metrics to ensure the dividend growth will continue through years.
7 Dividend Investing Principles to Follow
I’m not exactly following the buy & hold strategy recommended by many dividend investors. In fact, half of my portfolio is following the “classic” buy and hold model and the other half is more active as I plan on using both the impact of dividend growth (on the stock price and on the payment itself). I like to build a core portfolio of stocks I would probably never sell but I also like trading a few more stocks in and out to make a healthy profit. Imagine if you could still invest actively in individual stocks while building a rock solid portfolio. Imagine if you could use the fundamental principles of investing without getting bored or having to read hundreds of pages of stock research.
My investing website; Dividend Stocks Rock (DSR) follows the same dividend growth model I use to manage my own portfolio. I didn’t come up with these investing rules out of the blue. Each rule has been put in writing after several years of trading dividend stocks, reading through many financial research publications and listening to top investors and portfolio managers’ wisdom. Here are my 7 dividend investing principles:
ü Principle #1: High Dividend Yield Doesn’t Equal High Returns
ü Principle #2: If There is One Metric; It’s Called Dividend Growth
ü Principle #3: A Dividend Today is Good, a Dividend Forever is Better
ü Principle #4: The Foundation of Dividend Growth Stocks Lies in its Business Model
ü Principle #5: Buy When You Have Money in Hand
ü Principle #6: If You Know Why You Bought, You Will Know Why You Sell
ü Principle #7: Think Core, Think Growth
These principles are the foundation of my investing service providing investors with the support they need to manage their portfolio and succeed with a dividend growth investing strategy:
ü We manage real-life dividend portfolios and send trade alerts when we buy or sell a stock.
ü We provide you with pre-screened stock lists with various metrics.
ü We create 1 pager stock analyses to save you time from reading numerous pages of financial information.
ü We help you in your valuation process with an excel spreadsheet calculator using a two stage dividend discount model.
ü We write a bi-monthly premium investing newsletter to keep you updated on the stock market.
If you are interested in learning more about my site, you can check out my 7 dividend investing principles in details here. Let me know what you think!
DGI Disclosure: I own shares of DIS, JNJ. This article also includes affiliate links for which we may be compensated.
