What Is Dividend Growth Investing? How This Strategy Works (2024)

The dividend growth investing method is appealing if you want to earn money from your investments and also see their value increase over the years. So, what does it mean to be a dividend growth investor? Here’s a look at what this strategy involves.

Read: 3 Things You Must Do When Your Savings Reach $50,000

What Are Dividends?

Dividends offer a way for companies to share their profits with people who own their stock, usually given out every three months. Not all companies give dividends, but the ones that do are often seen as strong and reliable because they generate sufficient profit to distribute a portion to their shareholders.

How Dividend Growth Investing Works

Dividend growth investing is a strategy that focuses on companies not just for their current dividend payouts, but for their potential to increase these payouts over time. The core idea is to invest in companies with a track record of raising their dividends, which can indicate that the companies is performing strongly financially and is committed to returning value to shareholders. Over time, these increasing dividends can contribute to a growing income stream, while the reinvesting in dividends can further compound growth, and eventually the value of your investment going up.

How To Calculate Dividend Growth Rate

To calculate the dividend growth rate, investors typically look at the year-over-year increase in dividends per share. This can be done using a simple formula:

Dividend Growth Rate= ( Dividend Current Year – Dividend Previous Year / Dividend Previous Year) – 1

This formula gives you the dividend growth rate as a decimal. To convert it to a percentage, you can multiply the result by 100. This calculation reveals the year-over-year growth rate of a company’s dividend, providing insight into how quickly the dividend is growing. Calculating this rate over several years can give you a good sense of the company’s longer-term trend in dividend growth, which is crucial for dividend growth investing.

For example: If a company’s dividend was $1.00 last year and increased to $1.10 this year, using the above formula, the dividend growth rate would be: DividendGrowthRate = (1.10??’1.00 / 1.00) = 0.10.

Converted to a percentage, the dividend growth rate is 10%. This means the company’s dividend payouts grew by 10% from the previous year to the current year, indicating a positive growth in the dividends issued to shareholders. ​

Dividend Growth Investing Strategies

Dividend growth investing strategies emphasize selecting stocks with potential for consistent dividend increases, aiming for both income and portfolio growth. Here’s how you can build a strategy around dividend growth:

• Focus on quality: Invest in companies with a strong track record of profitability and dividend growth, which often indicates financial stability and a shareholder-friendly management approach.
• Diversification: Spread investments across various sectors and industries to reduce risk. Different sectors react differently to economic cycles, and diversification can help stabilize returns.
• Reinvest dividends: Automatically reinvest dividends to purchase additional shares, enhancing the compounding effect and accelerating portfolio growth over time.
• Long-term perspective: Maintain a long-term investment horizon. Dividend growth investing is about growing your returns over years or even decades, not quick gains.
• Monitor and adjust: Regularly review and adjust the portfolio as needed based on company performance, dividend growth rates and changes in the market or economic outlook.
• Yield vs. growth balance: While earning a high yield from your investments is appealing, it’s important to also look for investments that could increase their payouts over time. Sometimes, a lower yield with higher growth potential is more beneficial in the long run.

Using these strategies can help investors make the most of their investments by focusing on long-term growth and stability in dividend growth investing.

How To Start Investing in Dividend Growth Stocks

Here are some ways to get started with investing in dividend growth stocks:

1. Research and select stocks: Start by identifying companies with a consistent history of dividend growth. Look for companies with strong fundamentals, a healthy payout ratio, and a commitment to increasing dividends.
2. Use dividend growth ETFs or mutual funds: For those looking for a more hands-off approach or diversification, consider investing in ETFs or mutual funds that focus on dividend growth stocks. These funds do the stock picking for you, based on their dividend growth investing criteria.
3. Set up a dividend reinvestment plan (DRIP): Many brokerages offer the option to automatically reinvest dividends through a DRIP. This can be an efficient way to compound growth without incurring transaction fees on the reinvestment.
4. Stay informed: Keep up with financial news, earnings reports and any changes in dividend policies for the companies in your portfolio. Being informed will help you make timely decisions about buying, holding or selling your investments.
5. Be patient and consistent: Success with dividend growth investing comes from patience and consistency. Continuously invest in high-quality dividend-growing stocks, reinvest the dividends and give your investments time to grow.

By following these steps and strategies, you can use dividend growth investing to build a robust, income-generating portfolio over the long term.

What Is a Dividend Growth Investor?

A dividend growth investor is someone who seeks out stocks that not only pay dividends but also have a history of increasing their dividend payouts over time. These investors are typically in it for the long haul, focusing on the compounding effect of reinvesting dividends into additional shares of stock, which in turn may lead to even more dividends, creating a continuous cycle of growth.

Why Dividend Stocks?

Dividend stocks are the cornerstone of dividend growth investing for a few key reasons. Firstly, they represent companies that are often well-established and financially stable, which can provide a sense of security in your investment. Secondly, by focusing on stocks that have a history of increasing their dividends, you’re likely betting on companies that are not only performing well now but are also positioned for future growth.

Potential Benefits of Growth Investing

Dividend growth investing offers several key advantages for those looking to build and sustain wealth over time. Here are some of the main benefits:

• Steady income stream: Dividend growth investing can provide a growing stream of income, which is particularly appealing for retirees or those planning for retirement.
• Inflation hedge: Because dividend payouts can increase over time, they can help preserve the purchasing power of your investment income.
• Compounding growth: Reinvesting dividends to purchase more shares can accelerate the growth of your investment over time.

These benefits highlight how dividend growth investing can be an effective strategy for achieving financial stability and growth, making it an attractive option for a wide range of investors.

What You Should Consider

While dividend growth investing has plenty of appeal, there are also considerations to keep in mind. Companies can cut or eliminate dividends in tough times. Moreover, focusing solely on dividend-paying stocks may lead to missed opportunities in faster-growing sectors that don’t pay dividends.

Final Take

Dividend growth investing is a strategy that seeks to balance income and growth, appealing to investors who want a steady and potentially increasing stream of income. You might want to target companies that have a track record of paying and increasing dividends, so that you can build wealth over time.

Like any investment strategy, it requires research, diversification and a long-term perspective. With patience and a focus on quality, dividend growth investing can be a rewarding approach to building your financial future.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.