Topic: Dividend Stocks

Tips for your dividend growth investing strategy to increase your portfolio’s long-term returns.

November 14, 2020|by Scott Clayton

Add Comment

A dividend growth investing strategy should focus on investments with a history of paying a dividend, and not on stocks with high dividend yields

Growth stocks, by their very definition, should be a key part of any Successful Investor stock portfolio focused on steady gains over time. The key is to discover the stocks that will grow at higher-than-average rates within their industries, or within the market as a whole, for years or even decades.

A dividend growth investing strategy looks for growth stocks that also pay a dividend, which is less common than with, say, value stocks. The best growth stocks can offer above-average gains, and the dividend just adds to their appeal.

The Growing Power of Dividends Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

A dividend growth investing strategy should focus on quality

As with conservative dividend-paying stocks, dividend growth stocks offer investors an added measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, at the same time, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). We say more on that below.

As well, you should always remember that while growth stocks can hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.

That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have an established business and at least some history of building revenue and cash flow.

What to look for in growth stocks as part of a dividend growth investing strategy

We also look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

Dividend stocks are an important contributor to your long-term gains, and, as mentioned, dividend-paying stocks typically expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers. What’s more, as you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

Furthermore, when considering specific investments and buying or selling growth-stock picks start by putting all the important information we know about a company into perspective. For instance, while its new invention may be a marvel, how does it compare to what the competition is doing? Its new project may sound impressive, but how much impact will it really have on the company’s profit? If the firm’s debt looks high—will the company be able to keep up its agreed-upon interest and principal repayments?

How a high yield can harm a dividend growth investing strategy  

When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yield—simply because they have above-average yields.

That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend. Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Above all, for a true measure of stability, Successful Investors should focus on stocks that have maintained or even raised their dividends during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

In short, a track record of dividend payments is a strong sign of reliability and a strong indication that investing in the stock can be profitable for you in the future.

Top dividend stocks can boost your portfolio gains

If you include top-quality dividend stocks in your portfolio, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

Good dividend stocks are a valuable component of any sound Successful Investor portfolio.

Some critics of a dividend growth investing strategy claim that the scope is too narrow. Why do you agree or disagree with this concept?

What are your thoughts on a growth investing strategy? Do high dividends make it worth the risk?