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Where’s The Growth?

Almost any investment strategy that involves an emphasis on dividend paying assets can and does use the term “dividend growth” to refer to that strategy.  Sometimes there will actually be some growth, but usually less than the inflation rate.  Other times the growth part of the strategy is merely hoped for, but not required.  Even when the growth of payouts is emphasized, the actual growth of payouts is very low.  In general, the number of distinct approaches to dividend growth investing is only limited by one’s investment imagination.  Among all of the approaches, there are some that are both common and identifiable.  The most common of these are described below.

High Yield Dividend Stocks, or The More Money The Better

The search for high yields leads to many investment products, and some dividend payers are in this category.  In general, such products do not provide the low-risk, reliable streams that the dividend growth portfolio is seeking.  Also, high yield dividend payers typically do not have the requisite payout growth that defines the dividend growth portfolio.  These high yield approaches do provide a high current yield, and under appropriate management, can continue high yield payouts in the foreseeable future.  High yield debt instruments combined into a well-managed fund would probably also provide a consistent high yield, but with less risk. For this strategy, it is easy to ask “Where’s the Growth?”

Big & Safe Dividends

Since dividends happen to be the focus, it is logical to get them to be as big as possible.  This goal is shared with  the high yield approach.  But there are risks associated with some high yields, so a safety goal is added.  Then a selection is made among the high yielders based on safety.  Now it might seem that one would have the best of both worlds, high yield and safety.  But we can again ask “Where’s the Growth?”, and the “safe” part of  “big & safe” requires astute management. 

The Power of History

Steady, reliable, growing dividends from companies with long payment histories are achievable.  Historically, utilities and telecoms have provided dependable and growing income streams, and also provided these income streams at a fairly good current yield.  However, the growth rate of these payouts is very near or below inflation rates.  Thus, the purchasing power of the income stream can be completely eroded over time.  The income growth may be reliable, but inflation will destroy any gains.  Here the growth question can be rephrased to “Is the growth greater than the inflation rate?”

Don’t Take Chances

Reliability and safety are hallmarks of many approaches to dividend investing.  These strategies share some of the same characteristics as the historical payers, discussed above, but without the extensive history.  The search for safety can typically result in a reduction in yield.  Also, the attention to dividend growth is minimal within these general strategies, so we can ask “Where’s the Growth?”

Get Paid For Waiting

This approach is extremely popular within the modern investment paradigms.  Numerous wealth management strategies, fund managers and analysts try to predict near term price increases for stocks.  Sometimes, it seems as if the whole world of investment is dedicated to this simple predictive mantra.  Whenever the companies involved in these “capital appreciation” searches pay a respectable dividend, there is the added benefit that you can “get paid for waiting” until the prediction of a price rise comes true.  There is little attention given to the growth of income from the dividend payouts. “Where’s the Growth?”

Just Buy A Fund

There are three commercial data services and one proprietary fund manager that maintain various lists of dividend payers.  These are described in a Tutorial, and number close to 70.  These lists can vary by length of the company’s dividend history, the country in which it is domiciled, or a host of other ways to partition these lists.  Each of these various lists can form the basis of a fund containing the stocks of the companies on these lists, but weighted in a particular way.  This results in over 100 different funds that are all “oriented” to dividend payers in some way.  It would be great if one could just pick the fund with the highest payout growth and enjoy a safe, growing income stream.  However, the payout growth is not there, for lots of different reasons which are discussed elsewhere.

Income Without Growth

There are many income-oriented commentaries, funds, newsletters, etc., and most of these will discuss dividend-paying stocks at some point.  Some of these advice givers will actually use the word “dividends” in their title or in their promotional material.  But these sites are dedicated to income investments, where some of these investments pay dividends.  Some of these sites are oriented to income instruments that they believe are positioned to rise in price.  The growth of the income is not part of these income approaches. 

Where’s the Growth?

The only approach completely dedicated to income growth using dividends, and where the goal for the rate of growth in income is 2 1/2 to 3 times the inflation rate is Dividend Growth Investing.

Do you want your investment income to exceed the growth in your expenses? 

Do you want your investment income to easily beat inflation?

Do you want your investment income to maintain your purchasing power, or even to increase it? 

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