Dividend Growth Stocks: * Why We Are Dividend Growth Investors

We have all heard it... Stodgy, for old people, yawn, boring! These have all been used to describe dividend growth investing. As a dividend growth investor, I sometimes think our strategy is the most misunderstood. It seems everyone understands a traders mentality as evidenced by the numerous comments on capital appreciation - "Why would you buy that stock? It has been flat for 2 years." Most understand the income investors mentality as noted by comments like - "Why would you buy that stock when you can buy Amalgamated Risk and it pays a 9% dividend?" Both of these strategies can be successful, as can a dividend growth strategy. Periodically, it is good to remind ourselves why we are dividend growth investors.

Dividends Provide Investment Stability

In a troubled market, dividend growth stocks provide a degree of stability to your portfolio. While everyone else is panicked about their portfolio’s decline, dividend investors see a downturn as an incredible buying opportunity. Many are now referring to the last 10 years as the lost decade. It was only lost if you were focusing on capital appreciation. Investors in dividend growth stocks continued to see their income grow over the decade.

Dividends Are Real

Unlike earnings, dividends can’t be manipulated or faked. From an accounting standpoint, it is relatively easy through fraud and manipulation to make an income statement look quite impressive. I take great comfort in a company with a strong cash flows and a consistent history of increasing cash dividends. An increasing cash dividend keeps pressure on management to ensure the company is well run. If there are too many missteps, then eventually a dividend will slip. This can be disastrous for a company’s stock price. Earnings can be manufactured, cash can not. Always follow the cash and it just might lead you to a great company. There is no faking the cash that shows up in your brokerage account.

Dividends Provide Feedback

Dividends provide continuous feedback. As time passes dividend investors see their income steadily grow. You do not have to wait five to ten years to determine if the strategy is working. Each dividend and dividend increase provides the investor with reassurance that the strategy is working.

Reinvested Dividends Drive Equity Returns

Historically, reinvested dividends provided a significant portion of equities' returns. In Triumph of the Optimists: 101 Years of Global Investment Returns (2002), the authors looked at equity returns from capital gains and dividends from 1900 to 2000. They determined that performance in any given year was driven by capital appreciation, but long-term returns were largely the result of reinvested dividends. Looking at 101 years of data in the U.S. and U.K., they found that a market-oriented portfolio with dividends reinvested would have generated nearly 85 times the wealth of the same portfolio relying solely on capital gains.

Good Companies Pay Dividends,
Great Companies Grow Dividends

You expect your employer to give you a raise periodically. Why wouldn’t you expect the same from your investments? We have all heard of compound interest (interest on interest), but compound dividends (dividends on growing dividends) is even more powerful.

Dividends Are Perpetual

You don't have to cut down your income tree to enjoy a warm dividend fire. Unlike a capital gain strategy where you have to sell stocks to generate cash, spending dividends in retirement does not harm or erode your principle investment. In addition, a good dividend portfolio can be left to your children and their children.

Dividends Are Relatively Low Maintenance

You may not want to spend your retirement managing and worrying about your portfolio. Dividends from a quality, well-diversified portfolio are much more predictable than capital gains and best of all, they are passive. You don’t have to do anything, they just show up in your brokerage account each quarter. Inflation? Not to worry, the good companies routinely raise their dividends well in excess of the inflation rate. Retirement is not when you want to start learning how to invest in dividend securities. There is a degree of art to it -- start young, time is always a great ally.