Dividend investing is generally not well understood by many investors.
Ask your average investor to pick a dividend stock and they’ll probably seek out one of the highest yielding stocks in the index, without paying much attention to the sustainability or future growth prospects of the company’s dividend.
In my view, there’s a better dividend based investment strategy – dividend growth investing.
Dividend growth investing is a style of dividend investing that focuses on investing in companies that consistently increase their dividend payouts. Instead of just picking stocks for their high yields, the focus is on picking high-quality companies that have grown their dividends in the past and will continue to grow their dividends in the future.
Dividend growth investing benefits
It’s a strategy that has many key benefits.
Essentially, because the stream of dividends received grows year after year, the investor’s ability to compound is magnified exponentially.
Furthermore, dividend growth investing is likely to generate capital growth in the long term, as rising dividends lead to rising share prices.
Lastly, the strategy also offers comfort during bear markets and periods of high volatility. Not only do dividend stocks generally offer lower volatility than high-growth stocks, but by focusing on building an increasing dividend stream, instead of focusing on short-term capital gains, it’s easier to stick to an investment strategy during moments of market panic.
A long-term strategy
In my opinion, dividend growth investing is a strategy that’s suitable for many different types of investors, ranging from novice investors building a portfolio, to retirees seeking a reliable increasing income stream.
Bear in mind that dividend growth investing is a long-term investment strategy that takes time and patience to play out, so if you’re hoping to get rich overnight, dividend growth investing is probably not the best strategy for you.
I take a closer look at the advantages of dividend growth investing in this article here.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.