A dividend growth stock is a company that has managed to grow dividends for a certain number of years. Only a certain type of quality companies can afford to grow the business and shower its shareholders with a rising amount of cash for years if not decades.
I view long streak of consecutive annual dividend increases as a quality filter. It allows me to create a list of companies for further research. While I do examine each company I invest in, I do believe that Dividend Growth Investing has a strong merit.
There are several studies on the performance of Dividend Growth Stocks.
The first is the research from Ned David Research, which reviewed the performance of companies in the S&P 500 by dividend policy.
It shows that companies that grow dividends and initiated dividends have tended to deliver the best performance for companies in the S&P 500. Companies that paid dividends ended up delivering a better return than the equal weighted S&P 500 and non dividend payers.
The worst performing groups over the past fifty years seem to be non-dividend paying stocks and dividend cutters and eliminators.
The fascinating fact is that over the past decade, a lot of non dividend paying companies like Google, Facebook and Amazon ended up delivering great returns. Historically however, non-dividend paying companies were the ones that could not afford to pay a dividend, which is why their returns were not great. Perhaps the past decade is an aberration; or perhaps it is a shift in corporate policy for US corporations towards less dividends.
The second is the research from S&P, which reviewed the performance of the Dividend Aristocrats. These are companies in the S&P 500, which have managed to grow dividends for 25 years in a row.
Since 1989, the list of dividend aristocrats has done better than S&P 500. However, there were ups and downs in it. The 1990s were not a good time to be a dividend growth investor, as rising stock prices and growth stocks did very well. This is why few investors cared about dividends in the 1990s. In the 2000s however, dividend aristocrat companies did very well. This continued in the 2010s.
Despite the rise in equities, and growth companies since 2010, dividend aristocrats have managed to do well. This is a testament to the quality aspect of dividend aristocrats. After all, only a certain type of exceptionally managed company with a strong moat can deliver the rising earnings per share to be able to grow dividends for at least a quarter of a century in the first place.
I personally always enjoyed the list of Dividend Champions, Contenders and Challengers, which was created by David Fish. It listed companies with 25, 10 and 5 year streaks of consecutive annual dividend increases.
Sadly, Dave passed away in 2018. While the list is available for download at DripInvesting, there has been some uncertainty as to who will continue updating it in the future.
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