Dividend growth investing: how it works
Dividend growth investing focuses on companies that increase their dividend regularly, rather than on the highest current yield. The goal is an income stream that grows over time, ideally faster than inflation.
Why growth can beat a higher starting yield
A stock yielding 2% that grows its dividend 10% a year can pay more income than a stock yielding 5% with no growth after about a decade, on your original purchase price. Growth also tends to come from businesses with rising earnings, which can support the share price too.
What dividend growth investors look at
- Dividend growth rate: how fast the payout has increased over 5 and 10 years.
- Payout ratio: how much of earnings is paid out, which limits future growth if it is already high.
- Earnings and cash flow growth: dividends are paid from these.
- Debt level: heavy debt can force a company to cut the dividend in a downturn.
- Length of the streak: a long record of increases shows commitment, although it is not a guarantee.
The trade-offs
Low-yield growth stocks pay less income today. Past growth can slow down, and the stocks can fall in price like any other. Many investors mix growth and higher yield stocks depending on whether they need income now or later.
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Frequently asked questions
Is dividend growth better than high yield?
Neither is better for everyone. Growth favors rising income over time, while high yield favors income now. Very high yields can also signal risk.
How do I track dividend growth?
Compare a company's dividend per share year over year. Dividend101 shows each stock's payment history so you can see how it has changed.
Keep reading
- Dividend Aristocrats and Dividend Kings explained
- Yield on cost explained
- What is a dividend yield trap?
General education only, not investment, tax or legal advice. Rules can differ by country and security.