For conservative, income-minded investors, there are two metrics that jump out instantaneously when evaluating securities: the company’s track record of making distributions, measured by consecutive years of increases, and the size of the distribution itself, measured by the dividend yield.
However, there’s more to successful dividend investing than going after firms with an impressive track record of dividend increases or a juicy yield. For young investors especially, the one metric that is all too often overlooked, and wrongfully so, is the dividend growth rate of a security.
Stability is Nice, Growth is Even Better
Dividend growth, often expressed in annualized percentage terms, is a metric that quantifies the rate at which a particular company is growing its dividend year after year. This metric is important because it allows investors to gauge whether or not the rate of their stocks’ dividend increases are outpacing inflation. For example, if a particular stock has been raising its dividend by 2% on average for the last five years, then this stream of income will be more or less in line with inflation. However, if a company is growing its dividend at an average of 5% or greater every year, over the last five years for example, then we can be more certain that this particular investment will generate an inflation-beating income stream for our portfolios.
For young investors with time on their side, picking stocks with above-average dividend growth rates is vital because it allows for compound interest (assuming a re-investment of dividends) to work even more so in their favor.
Yesterday, we highlighted the need for yield, and today we’re digging even deeper, highlighting the importance of dividend growth. More specifically, we’re highlighting four companies from our list of 25-Year Dividend Increasing Stocks that boasted an annualized distribution growth rate of 20% or more over the last five years. In other words, we’re looking at stocks that boast very impressive track records with regards to both consistency and dividend growth.
- Helmerich Payne (HP ): Based out of Tulsa, Oklahoma, this drilling company has been around for almost 100 years. HP has grown its dividend for 42 years in a row, and its 5-year annualized dividend growth rate stands at an impressive 67.3%.
- Target (TGT ): This well-known retailer on our “Best Dividends Stock List” has been raising its dividend for 47 years in a row. Its 5-year annualized distribution growth rate stands at 23.5%
- Donaldson Company (DCI ): Although it may not be a household name, this pollution and treatment controls company has grown its dividend for 30 years without interruption. Its 5-year annualized dividend growth rate stands at 22.5%.
- Walgreens Boots Alliance, Inc. (WBA ): This well-known drug store chain has been growing its dividend for 39 years in a row, and its 5-year annualized dividend growth rate stands at 21.2%.
The Bottom Line
It’s important to consider several metrics before pulling the trigger on what appears to be a solid dividend-paying company. Look under the hood and make sure its dividend growth rate aligns with your objectives. Generally speaking, younger investors should opt for higher-growth stocks since they have a higher risk tolerance and time on their side.
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