Dividend Growth Investing is a strategy that invests money in stocks which increase its annual dividend every year.
The key is to hold these stocks over the long run so the rising dividend pours more passive income in your pockets.
Rising dividends means you can retire with dignity and aren't forced to continue working past your limit.
In this article, we'll explain dividend growth investing in depth and show you exactly how to get started on your DGI journey.
The Power of Dividend Growth Investing
Hartford Funds published a study that shows just how powerful dividend growth investing can be.
S&P 500 stocks that paid a rising dividend outperformed all other stock types by a wide margin.
Because the power of dividend growth investing combines with the power of compound interest to create a powerful 1-2 punch.
This is the ideal situation you want to create during your retirement years when your working income will most likely decrease.
As long as you hold your shares and choose excellent companies, you will raise an annual dividend “raise” as a reward for your patience and perserverance.
Is Dividend Growth Investing Worth It?
Absolutely. While it's not as popular as growth investing, you will most likely earn a much greater return in the long run because dividends do really add up over time.
Warren Buffett and his Coke investment provide an excellent analysis into the power of DGI.
Buffett has rarely transacted in Coke stock since 1989. He added to Berkshire's holdings in Coca-Cola in 1994, bringing its ownership to 100 million shares at the time, but Buffett has never sold a single share.
The stock has split two times since 1994, bringing Berkshire's ownership to 400 million shares. The cost basis on those shares is $1.299 billion. At the current stock price of $51.71 per share, Berkshire's investment in Coke is worth $20.7 billion. That leaves an unrealized gain of $19.4 billion on the investment.
The gains are even larger when factoring in dividends. At Coke's current quarterly payout of $0.40 per share, Berkshire's 400 million shares will bring in $640 million over the next year in dividend income. Since 1995, it has earned about $7 billion in dividends from the Coke investment.
Buffett understands the power of rising dividends and continues to rake in hundreds of millions of dollars from an investment he stopped buying into over 26 years ago.
Dividend growth investing is hard to beat when you think about the simple economics.
A good company will pay you more money each year as the company grows its sales, earnings & brand worth.
DGI keeps management honest and forces them to focus on returning value to shareholders instead of padding their pockets with lofty executives bonuses.
How to Get Started with Dividend Growth Investing
I wrote an article explaining how to build a dividend growth stock portfolio that explains asset allocation in depth.
For most people, you will do fine owning by choosing some dividend growth stocks from the list of S&P 500 dividend aristocrats.
I personally own the following DGI stocks in my retirement portfolio:
- Apple (AAPL)
- Realty Income (O)
- Proctor & Gamble (PG)
- Visa (V)
Alternatively, you can choose a low cost index fund or ETF that tracks dividend growth stocks like:
- Vanguard Dividend Appreciation Index Fund ETF (VIG)
- ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Both strategies will give you exposure to these powerful companies that continue to pay you an annual raise for doing nothing else other than owning shares in the company.
You can purchase these stocks & ETFs through any stock trading app or online broker such as Robinhood, Webull, Fidelity, Vanguard, eTrade or whatever broker you use.
Be sure to automatically set up your DRIP to reinvest those dividends to unlock the power of compound interest.