Dividend Growth Investing Strategy: What, How, and Why

Dividend Growth Stock Investing Fully Explained

Today’s topic is about dividend growth investing strategy. Because I want to answer 3 important questions for you.

First of all, what is a dividend growth stock investment strategy?

Secondly, how to start dividend growth investing?

Finally, why is dividend growth investing a good strategy to choose?

Then you can get started building your dividend income!

That’s our road map. So, let’s begin our journey to understand all about dividend growth investing strategy.

dividend growth investing strategy

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

What Is A Dividend Growth Investing Strategy?

First of all, an investment strategy is a defined approach to investing.  It helps guide an investor’s decisions about their investment portfolio.

Furthermore, an investment strategy provides a filter. Through which possible investment choices can be screened.

Finally, a dividend growth investing strategy is implemented by a certain type of investor. Specifically, a dividend growth stock investor.

This type of investor chooses to invest in stocks that pay dividends. Issued by companies that regularly increase the dividend rate per share. Paid to the owners of those shares.

How To Start A Dividend Growth Investing Strategy?

Dividend growth investing can be broken down into 5 steps. Those steps are:

  1. Find & identify dividend growth stocks
  2. Select & buy the best dividend-paying stocks
  3. Construct the stocks into a dividend growth investment portfolio
  4. Monitor the portfolio of dividend growth stocks regularly
  5. Reinvest all dividends until you need them

Not too difficult. Right? But, there’s much more.

Because, in a moment, I will go through each of these 5 steps in detail. For implementing a dividend growth investing strategy.

But first, I have the last of the 3 questions I posed at the beginning of this article to answer…

Why Pursue A Dividend Growth Investing Strategy?

Here are 7 good reasons to start a long-term dividend growth investing strategy:

  1. Dividends make up a large portion of stock market returns
  2. Dividend growth stocks provide strong total investment returns
  3. Reinvesting dividends compounds your return on investment
  4. Income comes from a mostly passive investment strategy
  5. Dividends can supplement retirement income streams
  6. Growing dividends provide a hedge against inflation
  7. Earn dividends even when the stock market goes down

To sum up, it’s about making money from dividend stocks!

Inspired yet? I hope so. Because I love dividends. And enjoy building my dividend growth machine.

But I’ve got more on the advantages of dividend investing. So, before we close, I will discuss each of these reasons in greater detail.

Just in case. You aren’t convinced yet.

But first, let’s work through the 5 steps. To implement a dividend growth investing strategy.

5 steps to be a dividend growth investor

Step 1: Find And Identify Dividend Growth Stocks

There are many excellent places to find dividend growth stocks. Allow me to highlight a few of them.

Stocks that have increased dividends for many years in a row are classified in dividend stocks lists.

Specifically, the lists of Dividend Kings, Dividend Aristocrats, and Dividend Achievers. These stocks have increased dividends annually for at least 50 years, 25 years, and 10 years, respectively.

Certain industries are also known for dividend growth stocks.

Those industries include utilities, consumer goods, technology, health care, and pharmaceuticals. Just to name a few.

Also, many exchange-traded funds (ETFs) and mutual funds focus on dividend investing. And, dividend growth stocks.

So, pick a good fund and review their holdings. Maybe some of them will appeal to you?

Also, I like and use the Simply Investing report. It takes the work out of finding and selecting dividend stocks.

It provides a list of the best dividend stocks to buy each month. Delivered right to my inbox.

You can learn more about Simply Investing here.

These are just a few places. To find good dividend growth companies

Once you find a few dividend stocks that interest you. Then develop a watch list.

A stock watch list is merely stocks you are considering for purchase. After you do a little more research.

Next, more on what to look for in your dividend stock research…

Step 2: Select And Buy The Best Dividend-Paying Stocks

It’s now time to analyze dividend growth stocks on your watch list. There are many metrics and measures that stock investors look at.

But, for a dividend growth investor, some are more important than others. So, here are a few metrics that I think are important.

These 5 measures get at the essence of how dividends work. For implementing a dividend growth strategy.

Consecutive Years Of Dividend Increases

Determine how many years in a row a company has increased its dividend. This may be the most important metric.

Because we are looking for companies that increase the dividends on their stocks regularly. Since we want long-term, consistent and reliable dividends from the stocks we choose to buy and hold.

I suggest screening for stocks that have increased dividends for at least 10 years in a row.

That is where the Dividends Achievers list comes in handy. All of the Achievers have accomplished this long record of annual dividend increases.

Dividend Yield

Determine the stock’s dividend yield. That is the annual dividend rate per share divided by the stock price per share.

I suggest looking for dividend yields in the range of 2% to 6%. Lower than 2% and the stock may not pay enough in cash dividends. In exchange for your investment dollars.

Higher than 6% dividend yield? This may indicate too much investment risk. Perhaps the dividend is not safe from a future reduction.

All types of dividend growth investment strategies focus on dividend yield to some extent. It is a core dividend metric.

Dividend Growth Rate

investment growth

Calculate the rate of dividend growth over a reasonable period. I think 10 years is a good measure.

It is long enough to establish a trend. But short enough to reflect how the business and dividend growth has performed in recent years.

Here’s a quick and easy way to check. Look at the dividend rate per share today. And find the dividend rate per share 10 years ago.

See if the dividend rate per share has doubled. If it has, that’s a 7% annual dividend growth rate.

7% annual dividend growth is very strong over a 10-year time frame. So, you might not find too many stocks like this. But, it’s a great rule of thumb for your dividend stock screening process.

There are more advanced calculations. But I don’t want to turn this into a math class today.

Furthermore, you will typically find this about a stock’s dividend yield and its growth rate. Specifically, they are inversely related.

This just means higher dividend yields will be associated with a lower dividend growth rate. And, vice versa.

Dividend Payout Ratio

Determine the dividend payout ratio.

The dividend payout ratio indicates a company’s future dividend payment capacity. And, current dividend safety.

Dividend payout ratios are calculated based on a company’s earnings.  Specifically, dividends per share as a percentage of earnings per share.

The dividend payout ratio can also be calculated based on a company’s cash flow. For example, cash dividends paid divided by free cash flow generated.

Free cash flow is simply the cash generated by a business after paying for capital investments. Those purchases to sustain the business into the future.

In either case, whether you use earnings or cash flow. A lower dividend payout ratio is better.

It indicates that dividend growth companies can withstand some business difficulties. And not have to reduce the dividend. And may even be able to increase its dividend during difficult economic times.

Thus, a lower dividend payout ratio provides a margin of safety. And room for dividend growth. For the ongoing payment of dividends into the future.

Dividend Stock Valuation

Being a long-term buy-and-hold dividend growth investor. Who adds funds to his or her portfolio regularly. Stock valuation may not be so important.

Because by investing regularly over the long term. A dividend growth investor benefits from good stock prices. And, not so good stock prices. But, those prices will average out over time.

On the other hand, it’s never a good idea to significantly overpay for a dividend growth stock. So, if you are inclined, I suggest checking a stock’s value before you buy.

I like a simple valuation tool called Gordon Growth. It is part of the family of dividend growth valuation models.

What is the next step for a dividend growth stock investor? Let’s discuss step 3…

Step 3: Construct A Dividend Growth Investing Portfolio

dividend growth investment strategy

Here are a couple of important points on putting together a dividend portfolio for regular income.

First, choose your stocks based on the metrics just discussed. Second, make your investments. Then build dividend stock investments into your dividend growth investing portfolio.

Here are some dividend investing tips. On how to go about the portfolio construction process.

First of all, keep your investing costs low. To do so, be sure to trade stocks and funds for free.

I use the Webull app. It’s fast and works great.

The app has solid research capabilities to help you identify the best dividends stocks. Also, you can set alerts so you never miss an opportunity.

To buy a stock on your watch list. At the right time, and the right price.

You can learn more about Webull here.

Second, invest in enough stocks for diversification. Research suggests 20-25 is a good number.

You may not have enough money to get to that number of dividend stocks immediately. So, make it a long-term goal to build to 20-25 dividend growth stocks over time.

Third, make sure no one stock is too big a piece of the total portfolio. For example, you may own 20 stocks, but let’s say 1 stock represents 90% of the portfolio’s value.

That’s not good diversification. So, spread your money around.

Finally, make sure the stocks are from different industries and stock market sectors. Consider a few utility stocks, several health care companies, and a couple of makers of consumer goods.

Do these things. And you will be sure to build a well-round dividend growth investing portfolio.

Okay, so you have started your dividend growth journey. And have some stocks constructed into a diversified dividend stock portfolio.

Next up. Monitoring and maintenance of your dividend stocks.

Step 4: Monitor Your Portfolio Of Dividend Stocks Regularly

Long-term dividend investing is mainly a passive investment strategy. By choosing the best dividend stocks, you can mostly set it and forget it.

But there are a few things to keep an eye on when monitoring your dividend growth portfolio.

Watch Asset Allocation And Rebalance As Necessary

Keep an eye on the things we just discussed in the previous section. When building your group of top dividend growth stocks.

First, don’t let 1 or 2 dividend stocks grow and become too large. Second, avoid letting one industry dominate your portfolio.

Add New Funds Selectively

You can accomplish these portfolio maintenance tips easily.

How? By adding new funds to new stocks. Or, stocks you own but have very little of.

Sell Dividend Stocks When Appropriate

Furthermore, keep your dividend portfolio balanced by selling off stocks or sectors that have grown too large.

Also, keep an eye out for any dividend growth companies in your portfolio. That has either reduced their dividend. Or, stopped increasing it.

Because they no longer fit with the dividend growth investing strategy.

Finally, make the process of monitoring your dividend stock portfolio and finances easy. For this purpose, I like and use Personal Capital.

Consolidate all of your investment accounts and expenses in one place online. So you have only one place to go to see your investments and spending. And just one set of login credentials to remember.

Best of all, Personal Capital is free to sign up and use. You can learn more about Personal Capital here.

Step 5: Reinvest All Dividends Until You Need Them

compound returns with dividend reinvestment

Finally, the cash from dividends will start rolling in after getting started on steps 1-3. So, if you don’t need the dividends for living expenses. I strongly suggest reinvesting them.

Either instruct your broker to reinvest dividends automatically into the stock that paid them. Or, let the dividends accumulate in cash. And reinvest them in a lump sum. To the stocks of your choosing.

Lump-sum dividend reinvesting is a great way to rebalance your portfolio. As part of step 4, dividend portfolio monitoring and maintenance.

But, there is one thing I must point out. That is, when you receive dividends, they are subject to income taxes.

The good thing is dividends receive preferential tax treatment. Meaning they are taxed at a much lower tax rate. As compared to income from your job.

But here’s an even better tip to minimize your taxes. And make the most of your investment dollars.

Specifically, buy and hold your dividend stocks in an Individual Retirement Account (IRA). For the tax benefits, they provide.

Have you been meaning to open an IRA? And start saving for a secure retirement?

If yes, then consider opening an IRA with M1 Finance.

They have a great app for managing your investments. It’s easy to sign up. And free to open your account and start investing in dividend stocks.

You can learn more about M1 Finance IRA accounts here.

Okay. That concludes the 5 steps to becoming a dividend growth investor. And implementing a dividend growth investment strategy.

Next, I want to address a couple of frequently asked questions.

questions about dividend growth stock investing

Simplify The Process By Choosing Dividend Growth ETFs

First, can the process of dividend growth investing be accomplished with a dividend growth fund?

The answer to this question is yes. You can reduce the chore of selecting the best dividend stocks in a couple of different ways.

You can use a top-notch stock advisory service. Like the Motley Fool stock advisor.

Or, choose from many exchange-traded funds (ETFs) and mutual funds. That focuses entirely on dividend growth investments.

Consider Vanguard Dividend Appreciation ETF. It invests in stocks from the list of Dividend Achievers.

By definition, the Dividend Achievers are dividend growth stocks. As I said earlier, they are stocks that have increased their dividends annually for at least 10 years.

First, invest in a dividend growth stocks ETF. Second, add to your investment regularly. Finally, reinvest all dividends.

And with very little time or effort. You have completed all 5 steps in the dividend growth investment process.

You have become a dividend growth investor! So don’t forget to consider dividend growth funds. They provide a very passive form of dividend income.

Learn More Reading Dividend Growth Investing Books

Second question, how to learn more about the dividend growth investing strategy?

On the other hand, many dividend growth investors want to choose their dividend stocks. And construct their dividend portfolio.

And I can’t blame them. That’s exactly what I have done for the last 15+ years.

The steps in this article show how to start dividend growth investing. But to do it yourself (DIY), continue to learn about the strategy.

Dig deeper with a good book on dividend investing. One of my favorites is The Little Book of Big Dividends.

It’s well written. And is easy to read.

Another book is called Dividends Still Don’t Lie. And there are many more. Just search on dividend stocks or dividends at your local library.

To continue the learning process. About the virtues of dividend growth investments.

And don’t forget our epic library of content on dividend investing right here. From Dividends Diversify.

Check it out and find 100+ articles on dividend investing. And the best U.S. dividend growth stocks. We have just about every topic covered. That a dividend growth stock investor would be interested in.

This leads me to my last point for today…

Why Pursue A Dividend Growth Investing Strategy?

why dividend growth strategy

At the beginning of the article, I listed 7 advantages of dividend growth investing. Let’s talk about each of those a bit more

Dividends Make Up A Large Portion Of Stock Market Returns

Over the long run. And I’m talking more than 100 years.

Research shows that dividends make up a large portion of stock market returns. Specifically, more than 40% of stock market returns come from dividends.

Dividend-Paying Stocks Provide For Solid Total Returns

Dividend stock prices increase in value over time. So, a dividend growth investor not only gets dividends paid in cash. But also receives the benefits of share price appreciation.

This makes for a substantial total investment return opportunity. Here’s a simple tip to estimate the total return potential of a dividend growth stock.

To estimate total investment return potential for a dividend stock. Take the dividend yield and add it to the expected future dividend growth rate.

For example, let’s say we have a stock with a dividend yield of 3%. And we expect the dividend growth company issuing the stock to increase the dividend annually by 6% into the future.

Take 3% and add 6%. For a 9% potential annual total return on investment.

This method is far from foolproof. But it can give you an idea. It is based on the time value of money. And part of academic research on investment return.

Finally, I’m always on the hunt for a combination of dividend yield and dividend growth of at least 8%.

Less than that, and there are likely better dividend growth stock investment opportunities. That I can find by continuing my search

Reinvesting Dividends Creates a Dividend Growth Machine

You can further enhance your investment returns too. By reinvesting all dividends received.

It’s called the compounding effect. Where the money you make from dividends. Is reinvested to make more dividends.

In essence, making money. On your dividends received.

Work a dividend growth investment strategy long enough. And you can create a dividend growth machine.

Dividend Growth Investing Is Mostly A Passive Strategy

It takes some time to get started with the dividend growth investing strategy. But once you get your portfolio set up with 20 or stocks.

Dividend growth investing is largely a passive strategy. Aside from adding new funds to your shares. And monitoring your portfolio a couple of times per year.

Furthermore, go the dividend growth fund route. And you can pretty much set it. And then forget it.

Dividend Growth Investing And Retirement Income Streams

At some point, you are going to want to take your dividends and spend them. It’s a great way to supplement retirement income streams from dividends. Or, for anything else you need the money for.

By investing in stocks that pay dividends. Receive and spend part of your investment returns. Without ever having to sell a stock.

Growing Dividends Hedge Against Inflation

Inflation is the steady increase in prices for goods and services. It is said to be one of the worst enemies of those who invest for income.

On the other hand, future dividend increases from dividend growth stocks offset the effects of inflation. By producing a rising stream of income that will likely exceed the inflation rate over the long run.

Another good way to hedge against inflation? Save on all your online purchases.

We use Rakuten. And get cash back when we make a purchase online. It’s a great way to save money.

Also, for a limited time get $10 just for signing up and making your first purchase. You can learn more about Rakuten here.

Dividend Growth Investor’s Earn Dividends During Bear Markets

Finally, it’s been a while since we had a long bear market in stocks. However, there will be another one. I know that for sure.

I just don’t know when it will happen. Or, how long it will last. I will leave that to those who use a market timing investment strategy.

For us dividend growth stock investors. We will continue to earn dividends every month. And, our cash will continue to roll in. Despite a deep and protracted bear market in stocks.

The dividend income will cushion the blow. And allow for reinvestment of dividends at low prices. Or use of those dividends for living expenses. Without having to sell shares at a stock market bottom

Okay. That is it for today. Allow me to summarize…

Summary: Dividend Growth Investing Strategy

First of all, dividend growth investors choose to invest in stocks that pay dividends. Issued by companies that regularly increase the dividend rate per share paid to the owners of their stock.

Furthermore, implementing a dividend growth investment strategy can be done in 5 steps:

  1. Find & identify dividend growth stocks
  2. Select & buy the best dividend-paying stocks
  3. Construct the stocks in a dividend growth investment portfolio
  4. Monitor the portfolio of dividend growth stocks regularly
  5. Reinvest all dividends until you need them

Even more, consider dividend growth stock ETFs and mutual funds. They can reduce the time required to build and maintain a dividend growth investment portfolio.

Finally, there are many advantages to dividend growth strategy. Here are a few. All of which we discussed today.

  1. Dividends make up a large portion of stock market returns
  2. Dividend growth stocks provide strong total investment returns
  3. Reinvesting dividends compounds your return on investment
  4. Income comes from a mostly passive investment strategy
  5. Dividends can supplement retirement income streams
  6. Growing dividends provide a hedge against inflation
  7. Earn dividends even when the stock market goes down

More Reading About Dividend Growth Investing

My Favorite Dividend Investing And Finance Resources

Throughout this article, I mentioned several of my favorite dividend investing and financial resources. I have summarized them here for your convenience.

conclusions about dividend investing

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

Dividend Growth Investing Strategy Explained