A Dividend Growth Investor doesn't have an easy life. It's often a lot more challenging than you might think. Most people think it's just simply the process of finding a suitable screener and then sorting a database for companies with the highest dividend growth rates. Then just buy those companies. This sounds simple enough, but nothing could be further from the truth nor more difficult to implement.
Dividend growth rates are never stable nor consistent over time. Prioritizing companies based on their three year dividend growth rate will provide a list that is different from a prioritized list of five year dividend growth rates. It'll also be different from a one year, two year and four list too. And to make things even worse, those dividend growth rates will also change over time. So you can see that stock selection quickly becomes a little more complicated than originally thought.
So here's what I like to do. I calculate the dividend growth rate for multiple time periods (i.e., one year, three year, five year and ten year periods) for each of the stocks I'm considering and then look for consistency across those time periods. A company that has a consistent dividend growth rate can be expected to continue that growth rate into the future. Companies that have a volatile dividend growth rate over multiple time periods will have an unpredictable dividend growth rate going forward, and that's not what I'm interested in for my portfolio.
All that is well and good but companies that grow their dividends at a different (faster) rate than the growth of their earnings will eventually have to reduce the growth of their dividends or their payout ratio will eventually expand beyond 100% and they will be distributing equity rather than profits. So you need to know the company's earnings growth rate over multiple time periods too.
So let's say you find the perfect stock. One with a large growing market capitalization and one with a nice, fat and healthy dividend growing at a consistently high rate over multiple time frames. All is well and good until you determine that you overpaid for it because it's not expected to increase anytime soon. It's at this point that many novice dividend growth investors become disillusioned. They've bought their dream security and yet they're overall wealth deteriorates during that first year of ownership.
Unfortunately this happens more often than most investors are willing to admit. Below you'll see some of the more popular companies that dividend growth rate investors like to invest in. Just looking at the three year dividend growth rate will show you why these companies are so popular. And yes, if you buy these and hold them for decades they will probably end up being excellent additions to your portfolio. Unfortunately in the short term some of them will be considered disasters. And that's because their one year estimated capital gain is so dismal that the one year estimated return on investment is minimal or even negative.
I point this out for anyone interested in dividend growth investing. It's not only important to invest in great companies paying a great and growing dividend, but those companies need to be purchased at a great price too. A dividend growth investor cannot just say the price I paid for the stock really doesn't matter because I'm just buying a growing dividend. The price of a stock does matter.
So if you're thinking of becoming a dividend growth investor, get ready to do some serious research in your candidates for consideration. Dig deep into the fundamentals of the company and learn to read charts and use momentum indicators. The more information you have, the less trouble you'll get into when you're investing your hard earned money. I can almost guarantee you that if you're buying a stock, the guy that's selling it to you has done his homework and knows exactly why he's selling it to you at the sale price. You just need to make sure you know why you're buying it at the buy price.
Good Luck and Good Trading.
Dividend growth rates are never stable nor consistent over time. Prioritizing companies based on their three year dividend growth rate will provide a list that is different from a prioritized list of five year dividend growth rates. It'll also be different from a one year, two year and four list too. And to make things even worse, those dividend growth rates will also change over time. So you can see that stock selection quickly becomes a little more complicated than originally thought.
So here's what I like to do. I calculate the dividend growth rate for multiple time periods (i.e., one year, three year, five year and ten year periods) for each of the stocks I'm considering and then look for consistency across those time periods. A company that has a consistent dividend growth rate can be expected to continue that growth rate into the future. Companies that have a volatile dividend growth rate over multiple time periods will have an unpredictable dividend growth rate going forward, and that's not what I'm interested in for my portfolio.
All that is well and good but companies that grow their dividends at a different (faster) rate than the growth of their earnings will eventually have to reduce the growth of their dividends or their payout ratio will eventually expand beyond 100% and they will be distributing equity rather than profits. So you need to know the company's earnings growth rate over multiple time periods too.
So let's say you find the perfect stock. One with a large growing market capitalization and one with a nice, fat and healthy dividend growing at a consistently high rate over multiple time frames. All is well and good until you determine that you overpaid for it because it's not expected to increase anytime soon. It's at this point that many novice dividend growth investors become disillusioned. They've bought their dream security and yet they're overall wealth deteriorates during that first year of ownership.
Unfortunately this happens more often than most investors are willing to admit. Below you'll see some of the more popular companies that dividend growth rate investors like to invest in. Just looking at the three year dividend growth rate will show you why these companies are so popular. And yes, if you buy these and hold them for decades they will probably end up being excellent additions to your portfolio. Unfortunately in the short term some of them will be considered disasters. And that's because their one year estimated capital gain is so dismal that the one year estimated return on investment is minimal or even negative.
I point this out for anyone interested in dividend growth investing. It's not only important to invest in great companies paying a great and growing dividend, but those companies need to be purchased at a great price too. A dividend growth investor cannot just say the price I paid for the stock really doesn't matter because I'm just buying a growing dividend. The price of a stock does matter.
So if you're thinking of becoming a dividend growth investor, get ready to do some serious research in your candidates for consideration. Dig deep into the fundamentals of the company and learn to read charts and use momentum indicators. The more information you have, the less trouble you'll get into when you're investing your hard earned money. I can almost guarantee you that if you're buying a stock, the guy that's selling it to you has done his homework and knows exactly why he's selling it to you at the sale price. You just need to make sure you know why you're buying it at the buy price.
Good Luck and Good Trading.
| Company Target Family Dollar VF Corp Lowe's Hormel 3M ExxonMobil Valspar Parker Han Lancaster WalMart Coca-Cola Eaton Vance | 3yr DivGR 19.76% 19.64% 18.95% 18.67% 16.01% 15.67% 13.28% 13.28% 12.98% 9.55% 9.45% 8.98% 7.54% | 1yr Cap Gain -3.66% -7.66% 5.29% -1.62% -1.15% 0.51% 2.87% 4.16% 6.36% 4.82% -0.60% 8.69% -1.82% | Dividend 2.68% 1.59% 1.69% 1.26% 1.78% 2.45% 2.96% 1.36% 2.05% 2.03% 2.22% 2.92% 2.32% | 1yr Est ROIC -0.98% -6.07% 6.98% -0.36% 0.63% 2.96% 5.83% 5.52% 8.41% 6.85% 1.62% 11.61% 0.50% |
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