Dividend growth investing has become popular lately, and for good reason. The idea behind this method is to invest in companies that are likely to have strong dividend growth in the future, thus continually increasing the amount of income generated from your portfolio. This income can then be reinvested into more dividend growth stocks, creating even more income. Dividend growth investing is like compounding on steroids. Imagine you have a portfolio which generates $1,000 of dividend income each year, and that the dividends grow at 8% annually. You could either keep those dividends or reinvest them into more dividend growth stocks. What’s the difference? See the chart below.
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If you don’t reinvest your dividends over 40 years then your income stream grows to about $20,000 annually, all through the magic of compounding. But if you reinvest those dividends each year in equivalent dividend growth stocks, your income stream grows to an astounding $58,500 annually–almost three times as much! Clearly there’s an advantage to dividend growth investing.
Finding dividend growth stocks
What makes a good dividend growth stock? Well, obviously the dividend needs to be growing. But yield is important too, and just because a dividend has been growing fast doesn’t justify a sub par dividend yield. The lower the yield the higher the expected growth rate needs to be. Here are some general guidelines that I use to look for dividend growth stocks:
|Dividend yield||Required 10-year annual dividend growth rate|