When I usually speak to my friends about investing in the stock market, they all think that I am speaking about stock trading. Trading is risky, a lot of people lost of lot of money while doing it, and that’s why most people are usually turned off when they hear the words ‘stock market’.
However, I then explain them that this is not what I do at all, and tell them about dividend growth investing. I explain that I am actually buying stocks just to benefit from the growing dividends that they are paying.
In this article, I will explain in detail what are dividend paying stocks, tell you why the ‘growth’ part of dividend growth investing is so important, and I will also give you some examples of dividend paying stocks. Let’s dive in!
The Basics: What is a Dividend Paying Stock?
They are a lot of stocks on the market that are paying returns to their shareholders, called dividends. A dividend is distribution of money decided by the directors of a company, and this distribution can happen quarterly, semi-annually, annually, and sometimes even monthly.
People usually thinks that dividends are a fixed percentage of a company earnings. However, that’s not the case: dividends are decided by the company directors, and can be paid from company earnings but also from available cash on the company accounts.
Some other stocks however, like Google, are not paying dividends, and are better suited for a trading strategy, which is not something you will find on this website.
But back to dividend paying stocks. Some of these dividend paying companies also have the habit to raise their dividends over time, and this is the type of companies that we will focus on for dividend growth investing.
Why is the Growth Aspect so Important?
I need to make a confession here: when I first started out with dividend investing, I was only focusing on one metric: the dividend yield of the stocks I was buying. I was only looking at how much the investment would produce per year.
But that’s only a small part of the story. The yield of a stock only tells you what the company is currently giving out as dividends. However, it is much more important to look at the history of the dividends distributed by the company, to check not only if they have consistently paying dividends, but also if these dividends are growing over time.
When you buy a company that is paying dividends, you want to be sure that they will continue to be paid in the future. I made this mistake in the past, by investing in companies that had a huge yield but that actually couldn’t sustain it on the long term, and therefore those dividends were cut some years after I invested in those companies.
But as said in the title of this section, the most important aspect is the growth of dividends over time. This is the real strength of dividend growth investing. When I started out in this field, I was only investing looking at the yield, for example in dividend paying ETFs (Exchange Traded Funds).
The problem is that those funds usually have a fixed dividend, that will be more or less the same in the future, just like a savings account for example. But now let’s compare that to a dividend stock with a strong history of growing their dividends, like IBM. If you had bought IBM shares in 2015, you would have bought them at 84$ a share with a yield of 0.96%, which is quite low.
However, in the meantime IBM consistently raised their dividends, and now you would have a YOC (Yield on Cost) of 6.19%! This is a solid yield on your initial investment, and it would have happened without any action on your side. This growth aspect is what makes dividend growth investing so interesting and can keep your investment in pace with inflation.
Examples of Dividend Growth Companies
Before the conclusion of this article, I wanted to give you some examples of dividend growth companies.
The first one that you will hear a lot about on dividend growth investor blogs is Johnson & Johnson (JNJ). They have a history of 52 years of dividend growth, so it’s just the perfect stock for a dividend growth investor. They are in the healthcare field, so as the worldwide population ages it will become an even more attractive stock for your dividend portfolio.
I can also put IBM here, that we already mentioned in the previous section. I love technology companies, and I think IBM is a very strong company that will grow in the future, especially in the Internet of Things (IoT) field.
Finally, I could also cite Coca-Cola (KO). They are very diversified amongst several brands, are present worldwide, and also have a strong dividend growth policy.
Is Dividend Growth Investing for You?
I personally think that dividend growth investing is the best way to invest in the market. I like the fact that by investing in dividend growth stocks, I get a growing passive income that I can either reinvest or use for my personal needs.
If your goal is to build tax-free wealth that you will then sell for retirement, this is maybe not a strategy for you as all dividends gains are taxed as they come in.
However, I really believe that dividend growth investing can be a good retirement strategy as well, as it’s less risky than hoping that your investment will have grown in value once you actually need the money.
Are you already investing for dividend growth, or do you plan to do so? Please share below in the comments!