Many investors who invest for income focus exclusively on yield, in order to build the necessary income stream to support them in retirement. While yield is one factor to consider, successful dividend investing is the outcome of focusing one’s attention to quality stocks that can grow earnings and dividends over time, and purchasing those at attractive valuations. Unfortunately, over the past century, inflation has been eating away the purchasing power of your dollars. As a result, companies that can grow distributions over time are much more desirable for income investors, since they will maintain purchasing power of their distributions without the need to reinvest these distributions. Companies that can grow revenues and earnings over time are much more likely to reward their investors with consistent dividend raises.
The value of dividend growth is most evident when someone attempts to reach a target level of dividend income. Investors in the accumulation stage, who focus on yield alone, can only rely on new fund additions and dividend reinvestment to grow their income. Dividend investors who focus on dividend growth in addition to dividend reinvestment and addition of new funds have a third tool to aid them in their goals. As we saw in actual examples I showed before, high yields, growing dividends and dividend reinvestment can result in turbocharging of dividend growth.
For example, let’s assume that an investor has a $100,000 portfolio in dividend stocks yielding 3% with no dividend growth. Their dividend income would be $3,000/year. However, if a second investor had purchased dividend growth stocks yielding 3% that also grow distributions at 6%/year with his funds, and didn't add any money, his projected dividend income would have grown to $3,180/year. In order to have generated the additional $180 in annual dividend income at 3%, the first dividend investor would have had to add $6,000 simply to keep up with the second investor. Over time, the second investor would generate higher income than the first one, who has to keep adding money simply to keep up. If the second investor also reinvests distributions and adds new money, they can reach their investment goals much faster.
The types of quality income stocks that can generate both earnings and dividend growth include:
Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. This dividend champion has raised distributions for 45 years in a row. In the past decade, Altria has managed to boost dividends by 11.60%/year. The stock currently sells for 18.30 times forward earnings and yields 4.10%. Check my analysis of Altria information about the company.
T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. This dividend champion has raised distributions for 29 years in a row. In the past decade, T. Rowe Price has managed to boost dividends by 16.60%/year. The stock currently sells for 16.90 times forward earnings and yields 2.50%. Check my analysis of T. Rowe Price for more information about the company.
Johnson & Johnson (JNJ), together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide. This dividend king has raised distributions for 52 years in a row. In the past decade, Johnson & Johnson has managed to boost dividends by 9.70%/year. The stock currently sells for 16.90 times forward earnings and yields 2.80 %. Check my analysis of Johnson & Johnson for more information about the company.
Emerson Electric Co. (EMR) provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. It operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. This dividend king has raised distributions for 58 years in a row. In the past decade, Emerson Electric has managed to boost dividends by 8.10%/year. The stock currently sells for 15.10 times forward earnings and yields 3.40%. I last analyzed the company on this site a couple years ago. I need to post my updated analysis soon.
While all of these companies are great, another important factor of long-lasting success in dividend investing is diversification. By owning at least 30 individual stocks representative of as many industries that make sense, investors would lessen the risk that a few bad apples can decimate their retirement portfolio.
Full Disclosure: Long MO, TROW, JNJ, UTX, EMR
- Dividend Champions - The Best List for Dividend Investors
- Dividend Kings List for 2015
- Rising Earnings – The Source of Future Dividend Growth
- The Perfect Dividend Portfolio
- Successful Dividend Investing Requires Patience
A dividend king is a company that has managed to increase dividends every single year for at least 50 years in a row. There are only 20 com...
One of the advantages of being a dividend investor is that I invest in businesses that meet a certain qualitative and quantitative criteria...
I like to invest in quality companies, with an established track record of dividend increases. I want to acquire these quality companies at ...
This guest post has been written by Mike McNeil, passionate investor, founder of Dividend Stocks Rock and author of The Dividend Guy Blog ...
Each week I review the list of dividend increases as part of my monitoring process. This exercise is helpful in evaluating how my existing ...
I wanted to thank you all for reading the Dividend Growth Investor website. This site is a result of my efforts to improve my investing over...
Most readers know me as a person that buys a stock in a company I like, and then I keep building a position as long as valuation and allocat...
CVS Health Corporation (CVS), together with its subsidiaries, provides integrated pharmacy health care services. It operates through Pharmac...
The J. M. Smucker Company (SJM) engages in manufacturing and marketing branded food products primarily in the United States, Canada, and int...
Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. This dividend champion has paid dividends since 1977...