Consider what would happen to a stock that has a long track record of raising its dividend but did not grow its share price as fast as its dividend. Soon the stock would have an enormous yield. If there were no fundamental problems with the stock, buyers would soon bid the price up as a result of pursuing the higher yield.
Put another way, barring fundamental problems with a stock its dividend growth rate and share price appreciation will grow at a similar rate over time, when all other things are equal.
Looking in my Dividend Growth Stocks Portfolio, there are several examples of income stocks with strong capital appreciation, including these that have more than doubled:
Cincinnati Financial Corp. (CINF) is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations. The company has paid a cash dividend to shareholders every year since 1954 and has increased its dividend payments for 56 consecutive years. I originally purchased the stock on 7/12/2010 at $27.12 per share. It is currently trading near $76 per share. Yield: 2.5%
General Dynamics (GD) is the world's fourth largest military contractor, and also one of the world's biggest manufacturers of corporate jets. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 26 consecutive years. I originally purchased the stock on 8/10/2010 at $63.54 per share. It is currently trading near $148 per share. Yield: 2.0%
Leggett & Platt Inc. (LEG) makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as products for non-furnishings markets. The company has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 43 consecutive years. I originally purchased the stock on 3/5/2010 at $20.29 per share. It is currently trading near $52.50 per share. Yield: 2.6%
National Retail Properties, Inc. (NNN) is an equity real estate investment trust that invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants. The company has paid a cash dividend to shareholders every year since 1985 and has increased its dividend payments for 25 consecutive years. I originally purchased the stock on 9/15/2005 at $20.06 per share. It is currently trading near $51 per share. Yield: 3.6%
Raytheon Company (RTN), the world's fifth largest military contractor, specializes in making high-tech missiles, advanced radar systems and sensors, defense electronics, and missile-defense systems. The company has paid a cash dividend to shareholders every year since 1964 and has increased its dividend payments for 12 consecutive years. I originally purchased the stock on 6/04/2012 at $49.09 per share. It is currently trading near $140 per share. Yield: 2.1%
Illinois Tool Works Inc. (ITW) is a diversified manufacturer that operates a portfolio of 60 business units that serve industrial and consumer markets globally. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 53 consecutive years. I originally purchased the stock on 10/03/2008 at $42.39 per share. It is currently trading near $117 per share. Yield: 2.2%
Yield and dividend growth are extremely important when building an income based portfolio. However, capital appreciation is a special treat that we can enjoy at the time of our choosing, or we may choose to let our heirs enjoy it. If we choose to let our heirs enjoy the capital appreciation, then the appreciation will never be taxed since the cost basis for inherited stock is usually based on its value on the date of the original owner’s death.
Full Disclosure: Long CINF, GD, LEG, NNN, RTN, ITW in my Dividend Growth Stocks Portfolio. See a list of all my Dividend Growth Portfolio holdings here.
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