The Trade-Off Between Dividend Yield and Dividend Growth

Life is full of choices. 

A few examples include:

Should I spend money on things today, or save money for the future?

Ultimately, you need to strike the right balance between those two seemingly opposite ends of the spectrum.

This is where trade-offs come handy, because they force a balance, a compromise between these two ends of the spectrum.

In the world of Dividend Growth Investing, the ultimate trade-off is the Dividend Yield versus Dividend Growth Connundrum.

On one hand, buying a company with a high dividend yield today would provide high income today. However, this investment may not grow the dividend to maintain the purchasing power of that income. In addition, that high yielding investment may have a high payout ratio. A higher payout ratio may be a problem in a recession, when earnings decline, thus increasing the risk of a dividend cut. 

On the other hand, buying a company with a high dividend growth today, could provide high income in the future.

This investment would not provide high income today however. Even though the dividend is expected to grow at a high rate of return over time, this does require patience. In addition, there is a possibility that this growth expectation does not materialize, as growth slows down. 

All of this is a gross simplification. There are a lot of data points to consider, and possible exceptions, but I've tried to summarize it to the best way possible. That being said, I view three different types of dividend growth companies, based entirely on this yield/growth trade-off.

I personally try to think through those trade-offs when I review a company. In general, expected returns are a function of:

1. Dividend Yield

2. Growth (EPS or Dividend Growth as they are roughly equal over time)

3. Change in valuation multiples

For example, for a company like Verizon (VZ) today, you get a dividend yield of 6.75%. You have an expected dividend growth rate of about 2%. This nets to an expected return of 8.75%. Let's call it 9% for simplicity.

On the other hand of the spectrum is a company like Visa (V). You get a dividend yield of 0.70%. However, dividends have a high expected rate of growth. If Visa manages to grow dividends by 12%/year, it can generate high yields on cost for patient long-term investors. Along with high expected returns of roughly 12.70%. Let's call it 13% for simplicity.

We can go back 10 or 15 years, and see that an investment in Visa would have been a smarter choice than an investment in Verizon. This of course is used merely to illustrate a point.

At the very end of 2009, Verizon sold at $27.59/share. The company paid an annual dividend of $1.90/share. The starting yield was high at 6.88%. Fast forward to the end of 2024, and the stock sold at $39.99/share and paid an annual dividend of $2.72/share. Therefore, the investor from 2009 would be generating an yield on cost of 9.85%, on top of the modest capital gains they generated.

At the end of 2014, Verizon sold at $46.78/share and had an annual dividend of $2.20/share. The starting yield was 4.70%. Investors who bought it back then would be sitting on a small unrealized capital loss, but generating an yield on cost of 5.81%.

Let's look at Visa.

At the very end of 2009, Visa sold at $21.86/share. This was adjusted for stock splits. The company paid an annual dividend of $0.12/share. The yield was low in 2009 at 0.55%. Fast forward to the end of 2024, and the stock sold at $316.04/share and paid an annual dividend of $2.36/share. The current yield is still low at 0.75%. However, the investor from 2009 would be generating an yield on cost of 10.80%, on top of the exceptional capital gains they generated.

At the end of 2014, Visa sold at $65.55/share and had an annual dividend of $0.48/share. The yield was low at 0.73%. However, investors who bought it back then would be sitting on a high unrealized capital gain, but generating an yield on cost of 3.60%.

The yield on cost for Visa is higher than Verizon over the past 15 years, and the same is true for the unrealized capital gains.

Over the past ten years however, Verizon still has a higher yield on cost than Visa, notably due to the higher starting yield. However, Visa still delivered higher unrealized capital gain.

I would argue that Visa's dividend is better covered than Verizon, due to it's lower payout ratio and higher expected growth in earnings. However, Visa's stock is not cheap today, as it discounts expectations for growth to continue. Visa sells for 30.85 times forward earnings and yields 0.68%. It has a forward payout ratio of 21%.

Verizon's stock is cheaper today, selling at 8.50 times forward earnings and yields 6.80% today. The forward payout ratio is 58%. However that's because the market expects small growth, if any. The high payout ratio also makes this dividend riskier.

Ultimately, life is full of trade-offs. The decision of whether to focus more on dividend yield versus dividend growth, or vice versa, is one such trade-off. 

Where you lean on the spectrum of this trade-off would depend on various factors, such as your expectations, risk profile, timeframe, experience, goals and objectives etc.

Hope you enjoyed today's article, and you get to thinking about those trade-offs you are making, when making your next investment. I know I do think about the trade-offs involved, whenever I try to build out my portfolio, brick by brick, to reach out my own goals and objectives.

23 Dividend Growth Companies Raising Dividends Last Week

I review the list of dividend increases every week, as part of my monitoring process. Dividends have signaling power about management's outlook for the business. As such dividend increase announcements could provide useful insights, if you know how to read them. Which goes hand in hand with monitoring.

This exericise helps me review existing holdings and also potentially identify companies for further research.

This exercise also shows how I can quickly evaluate a population of dividend growth stocks, and narrow it down to a more manageable list for further research.

Over the past week, there were 62 companies that raised dividends in the US. Twenty three of these companies that raised dividends also have a 10 year track record of annual dividend increases under their belt. The companies include:

As I mentioned above, this list is just a starting list for research and monitoring. It's not a recommendation. In order to narrow down the list, I would look at each company fundamentally, and then do a review of its valuation before deciding where to go next. I also do try to invest in companies I understand, which also prevents me from investing in companies I do not understand. You may like this old post about my entry criteria.  You may also like my post about valuation here. 

Note that I didn't include Meta's (META) first dividend increase in this review. Note that I did find it a little low - a measly 5% to 52.50 cents/share on the quarterly dividend. I would have expected that a large company in the initial phase would have stronger dividend growth. Or perhaps Meta is stating that whatever it is they are building today may need a ton of cash. Hopefully, those large CAPEX investments are allocated at a high ROI to generate further FCF/share growth. 

I also wanted to note that there were a few non-US companies that raised dividends last week as well. These are well-known and perhaps widely held as well.

Those include:

British American Tobacco (BTI), which announced a 2% hike in the annual dividend to GBP 2.4024/share. This is the 28th consecutive annual dividend increase for this international dividend aristocrat.

Nestle (NSRGY), which announced a 1.67% raise in the annual dividend to 3.05 CHF/share. This is the 29th consecutive annual dividend increase for this international dividend aristocrat. 

I was unsure whether to note it or not, but it seems like Unilever (UL) is starting to increase dividends again. The company just raised quarterly dividends to €0.4528/share, which is 6.09% raise over the dividend paid during the same time last year. It's also a 3% increase over the prior dividend. That's after keeping it unchanged for three and a half years, and losing its dividend aristocrat status in 2022.

How I quickly review companies

I have a simple process for evaluating companies. I focus on several key factors, which tell me whether a company is worth putting on my list for further research or not at all. 

1. In general, I look for companies that have managed to increase dividends for several years in a row. At least 10 consecutive annual dividend increases is a minimum requirement, as it signals a business model that has produced excess cashflows through a typical boom/bust economic cycle.

This narrows down my population a little bit, to a more manageable list of about 500 companies in the US as of the beginning of 2025. There are several hundred more of those companies abroad.

2. Second, I look for growth in earnings per share over the past decade. Rising earnings per share are the fuel behind future dividend growth. In other words, without growth in earnings per share, future dividend growth will end at some point. Note that for certain entities such as REITs for example, one needs to look for more unique metrics such as Funds from Operations (FFO).

In general, I like to see rising earnings per share over the past ten and five years. I realize that EPS will not go up in a straight up line all the time, and some fluctuations may occur. These days, we have one-time items hitting the earnings, which can temporarily sway things in either direction. But for as long as these one-time items are not always occuring each year, we should be good to go. Also note, it is very likely I should be using Free Cash Flow Per Share instead of Earnings Per Share. In general, their long-term growth should be identical relatively speaking. For the purposes of this conversation, I would use those interchangeably.

3. Third, I look for growth in dividends per share over the past decade. I like to look at most recent dividend increase, along with historical growth in dividends per share. This exercise helps me identify relatively quickly whether dividend growth is accelerating or decelerating. I understand that dividend growth will fluctuate from year to year or period to period. However, I do subscribe to the signaling theory, which states that management provides us signals about how the business is doing, by setting dividend growth rates. In other words, if dividend increases starts becoming anemic all of a sudden, this means that most likely business conditions are softening. Perhaps the previously believed wide moat firm may be seeing its moat eroding from changes. If the dividend growth stays at a fairly steady clip, then it's likely business as usual, for as long as earnings are also growing at a steady clip, and the payout ratio is not rising too much and too fast.

A rapid increase in dividends per share may signal confidence in the business. However, it may also be signaling that management is bluffing too in my opinion. I've witnessed very high dividend raises by companies in the past, notably CenturyTel about a decade or so ago and UPS around the time of Covid. These companies fortunes turned south afterwards. On the other hand, for some companeis like Dick's Sporting Goods, a high raise in dividends was a precursor to more good times ahead.

4. Fourth, I look for trends in the dividend payout ratio. In general, I prefer a flat dividend payout ratio that is below 60%. A lower payout ratio provides a good margin of safety than a higher payout ratio. That being said, there are several other factors to consider. For a company in the initial phase of dividend growth, the payout ratio would be going up for a while, as dividend growth exceeds earnings growth, up to a point. For many companies in certain industries, such as tobacco or for REITs, the payout ratio is going to be high, which is why the analysis needs to focus on stability of underlying cashflows/earnings. Dependable and less cyclical cashflows can support that high payout ratio, but it is still a risk of unknowns as cuts can be more likely in higher payout ratio companies than lower payout ratio ones.

For most companies in the sweet spot, a good range in the payout ratio is probably a good bet. 

That being said, I try to look at trends in earnings per share, dividend growth and payout ratio together, rather than in a vacuum. There are relations between these indicators that need to be looked together to gain a fuller picture of what is going on.

In general I also look at valuation, but this is a fun piece that takes things even further. Also, it's great to look at it after you've looked at stability of cashflows, their growth, payout ratios and the signaling power of the dividend. Or rather, taken all into consideration. Then one needs to take into consideration interest rates, the cyclicality of the business, growth and growth expectations and then determine whether this valuation range is reasonable or not. Valuation is part art, part science.

 In terms of a somewhat succint summary, it is good to think in terms of trade-offs in the full picture. The expected returns formula I use really summarizes things neatly, and makes you think about how changes in the different variables impact overall results over a given time period.

25 Companies Rewarding Shareholders With Raises

I review the list of dividend increases each week as part of my monitoring process. I use this process to review existing holdings and potentially uncover more companies for further research. 

That is just one part of my overall monitoring process however.

While I may report on some of the increases, that doesn't mean these companies are automatic buys. The intelligent dividend growth investor would have to apply a set of logical criteria to focus on the promising companies from a fundamental perspective, and then apply another net to catch them at a hopefully good valuation.

In my case, I apply a set of criteria to decide whether I research a company further or not.

Dividend increases do provide signaling value to me in my research process, because they basically provide an input into managements thoughts about the business prospects. It's great to bump this up against past results and my expectations. Then combine with other data I track.

Basically increases are one of the tools that help me monitor existing holdings, monitor the heart of dividend growth investing universe &potentially uncover companies for further research

I wanted to point all that for context, as my sharing increases always seem to confuse someone who is new to my work.

During the past week, there were 69 companies which raised dividends in the US. I reviewed each increase, and narrowed it down to more established dividend growth companies. I define established dividend growth companies as those that have at least a ten year streak of consecutive annual dividend increases under their belt.

In the old days, when we still had a recession every five years or so, a ten year requirement of annual dividend increases was a test of whether a company is cyclical or not. Today, when recessions are happening once every decade, if not even longer, this is perhaps sounds too conservative. However, we still need to establish a baseline for quality. I would argue that someone who is focusing on long-term investing, spanning decades, is looking for companies that can hopefully compound earnings, dividends and intrinsic value for decades. Rather than look for quick hits that may rise quickly to the sun, only to have their wings burned off just as quickly. 

Anywho, of the 69 companies that raised dividends last week, only 25 have managed to grow dividends for at least a decade. The companies that both raised dividends last week and have a ten year track record of annual dividend increases are listed below:

As I mentioned above, this is just the first step in narrowing down an investment popiulation. While this weekly dividend increase exercise is helpful as part of the monitoring process, it is also a good exercise in applying criteria to narrow down any list of companies to an investable universe.

At a minimum I would look at:

1. Growth in earnings per share over the past decade

2. Consistency of dividend growth over the past raise versus the 5 or 10 year historical record

3. Dividend payout ratio which is not too high, and not trending upwards

4. Good valuation. Which is part art, part science.

Note, the list above already includes only companies that have managed to grow dividends annually for at least a decade. In a regular population screening, that would be a key entry criteria.

Then I would review the company. But in general, a diversified portfolio of companies that pass through these types filters would likely generate good results to the investor who applies them. 

Relevant Articles:

- 34 Companies Rewarding Shareholders With Raises

- 16 Companies Rewarding Shareholders With Raises

- Nine Dividend Growth Stocks Raising Dividends Last Week

- Twenty Dividend Cash Machines Hiking Dividends Last Week

34 Companies Rewarding Shareholders With Raises

I review the list of dividends increases as part of my monitoring process. This exercise helps me monitor existing holdings and potentially identify new companies for further research.

Last week was a very busy week for dividend increases. There were 70 companies in the US which managed to increase dividends to shareholders. This time of the year is typically a busy time for dividend increases in general.

I typically focus my attention on the companies that have managed to increase dividends for at least a decade, in order to identify companies that are more likely to keep growing those dividends in the future.

There were 34 companies that raised dividends last week, which have also managed to increase anual dividends for at least a decade.

This is a list of companies for further review. Most seem attractive as businesses, but that doesn’t mean that they should be invested in at any price, regardless of valuation.

The next step is to check each business, in order to determine if it is worth further review. I would look at ten year trends in earnings per share, dividends per share, payout ratios, shares outstanding. I would try to understand what the business does, and make an assessment if the good times would continue, so that I can expect higher earnings, dividends and intrinsic values over time. I would look at the valuation relative to earnings and dividend growth, in order to determine if the business is fairly valued, if it looks promising too. 

Relevant Articles:

- 16 Companies Rewarding Shareholders With Raises

- Three Dividend Growth Companies Increasing Dividends Last Week

- Nine Dividend Growth Stocks Raising Dividends Last Week

- Twenty Companies Spreading Holiday Cheers To Shareholders