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Dividend Growth Stocks for the Win

Without getting too deep into the actual statics of how much of the broad stock market return is based on dividends and dividend reinvestment there are some much more subjective reasons why I like consistent dividend paying stocks, and in particular dividend growth stocks.

Buying a Share of Stock Makes You a Part Owner of that Business and I want to be Treated as Such

It is easy to lose sight of the fact that when you purchase a share of stock you are buying a tiny (albeit a very tiny) fraction of a business.  Well if you were to buy any part of any private (i.e. not publicly traded) business wouldn’t you ask how are you going to share in the profits of the business? If you bought a piece of a diner, would you just accept that you’ll see your real pay day when someone buys it from you years and years later? Obviously, there is something very different from owning a diner and owning T-Rowe Price with regards to liquidity, but none the less I want to be paid for deploying my capital.

Further, I want current management to know that their predecessors have paid a portion of their profits to the owners (shareholders) of the business for decades, and decades, prior.  To not do so should be taken very seriously.

One Day I’d Like to Live off an Income Stream without Eating into Principal

Every month, I screen for undervalued dividend growth stocks and the very first part of that screen is to highlight those stock that have increased their dividend payment to owners every year for the past 20+ years.  Right now, there are 150+ stocks that have paid an increasing dividend each and every year for two decades! To put that into persepective that I can remember (I am 34):

  • Shit show that was the housing bubble
  • 9/11
  • Dot Com bubble
  • Perpetual wars that seem like we are never getting out of

A handful have even been doing it for 50+ years! These companies make it possible (obviously nothing is guaranteed) for regular investors to build their own stream of income that will at least grow with inflation (obviously could out pace or lag inflation depending on the dividend growth of the particular stocks you buy).

A Long History of Increasing Dividends Means That it is Less Likely the Dividend will be Cut in the Future

Everyone has seen the statement, “past performance is no guarantee of future results” and the sentiment of that statement can’t be reiterated enough.  Notwithstanding, if you were on the board of a publicly traded company that has increased their dividend payment since President Clinton was arguing what exactly “sexual relations” means, are you going to be the one that pushes the “don’t increase” vote?  Probably not.  Historical evidence agrees, as a study from states,

While most dividend-paying companies will always claim that they have no plans to reduce their dividends, the results can be quite different. The historical numbers, however, don’t lie. Simply put, companies that have a history of dividend cuts are more likely to make cuts in the future. The same holds true for companies with a history of increasing their dividends.

Stagnant dividend payouts is also unattractive to dividend-minded investors. In general, investors should look for stocks with industry-leading (but sustainable) dividend yields, with a solid history of increasing their dividends.

All this May be Moot if You Invest in ETFs and Mutual Funds

Individual stock purchases are not for everyone, they obviously come with risk not born by large basket type purchases like ETFs and Mutual Funds.


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