Dividend Growth Investing – A Successful Investment Strategy
Before we review the details of the winning strategy, let’s discuss some approaches that are less effective.
- Don’t focus on dividend yield, that’s not the most important metric. It’s mostly telling you how much you get paid today based on the stock price. If all you want is income, it will be important but remember that you will be sacrificing total return growth over time. More on that later.
- Forget about yield on cost, that’s just a feel-good metric. It’s a number that should go up over time but that’s not really telling you much. You get to know how much income your invested capital is providing you but you cannot use that to select a future investment as you will need to use the current dividend yield.
CONSISTENT DIVIDEND GROWTHis what has been working. I did start with high yield stock and it was nice to see the dividend income but my total portfolio growth was not where it should have been. What can I say? I was a newbie dividend investor and I wanted to generate retirement income from my portfolio and that’s what I was doing – only generating income and not growing my portfolio. In my strive to become a better investor, I stumbled upon the 10% dividend growth, the chowder rule, and the total return value of a portfolio. Let me show you why those 3 concepts matter.
10% Dividend Growth
This concept comes from a BNN interview with Thomas Cameron where he mentioned that his stock picks must past the 10/10 rule. The rule is essentially a really strong filter to select companies with the ability to grow their earnings consistently and at a certain rate by paying a dividend with a minimum growth rate. There are 2 criteria to the filter:
- 10 years of consecutive dividend growth
- 10% annual growth rate
Here is why this filter is better than using ANY US DIVIDEND ARISTOCRATS! Yes, even if an aristocrat must have increased their dividends for 25 years, the increase could simply be 1 cent.
The 10/10 rule expects a 10% CAGR (compound annual growth rate) dividend growth to pass the test. To achieve consistent dividend growth with a 10% CAGR growth, a company must be able to grow the earnings, otherwise, the payout ratio will get out of hands. If the dividend payout ratio becomes an issue, investors will start assuming the dividend is at risk. Investors will sell, the price will go down, the dividend yield will go up and either the dividend is reduced or there is