Dividend Investing Ideas Center
Have you ever wished for the safety of bonds, but the return potential...
Stoyan Bojinov May 21, 2015
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.
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.
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.
Follow us on Twitter @Dividenddotcom