Wednesday, August 13, 2014

The Evidence for Dividend Growth Investing

This following post is written by Ben Reynolds, who runs the Sure Dividend site. Sure Dividend focuses on high quality dividend growth stocks suitable for long-term investing.

Dividend growth stocks are an excellent vehicle to build passive income over time. The idea of owning businesses that pay you more money year after year has a certain appeal to those in pursuit of passive income. Not only do dividend growth stocks give you a raise year after year, they have also historically outperformed the market. The Dividend Aristocrat Index is made up of businesses that have raised their dividends for 25+ consecutive years. The Dividend Aristocrat index has outperformed the S&P500 by 2.41 percentage points per year over the last decade.
Source: S&P500 Dividend Aristocrats Fact Sheet

Dividend Aristocrats & Quality

The Dividend Aristocrat index is full of high quality businesses with a long history of success. Some examples are Coca-Cola (KO), Wal-Mart (WMT), PepsiCo (PEP), 3M (MMM), and Johnson & Johnson (JNJ). There are 54 businesses in the Dividend Aristocrats Index. You can download a full list of current Dividend Aristocrats sorted by dividend yield, growth rate, and P/E ratio right here. Not only do Dividend Aristocrats have a long history of profitable growth, they also tend to have higher profitability on average. The average return on assets (ROA) for the S&P500 is 7.23%, compared to 9.58% for the average Dividend Aristocrat stock.

High Yield & Low Payout Historically Outperform

You would likely do quite well to invest in Dividend Aristocrat stocks. Not all Dividend Aristocrats are created equally, however. The higher the dividend yield, the better within reason. A company with a high yield and a high payout ratio will have very little earnings to reinvest in growing the business. Businesses with high dividend yields and low payout ratios have historically performed very well. In a study done by Credit Suisse, high yield low payout stocks outperformed high yield high payout stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao

Don’t Forget the Growth in Dividend Growth Investing

Aside from yield and payout ratio, future growth potential is an important aspect of successful long-term dividend growth investing. If you invest in a business with poor growth prospects, your dividend payments will stagnate and may decline over time. Once again, facts back up common sense. Dividend growth stocks have outperformed dividend stocks with unchanging dividends by 2.4% per year from 1972 to 2013.
Source: Rising Dividends Fund Research from Oppenheimer

Buy the Business, Not the Stock

High quality dividend growth investing requires a specific mindset. Dividend growth investing is most suitable for long term investors. Dividend growth stock prices fluctuate from year to year. Over long periods of time, truly superior businesses that can grow their earnings and dividends year after year will reward shareholders. If you view your investments as electronic bets that may go up and down, you will quickly be shaken out of your positions.

High quality businesses take years to compound growth. If you view your investments as a partnership in large businesses you will likely foster a long-term outlook. Understanding that you own a percentage of a fantastic business makes you less likely to sell as the share price bounces around because you understand the underlying value of your investment instead of seeing it as a ticker symbol in a trading account.


Sure Dividend’s 8 Rules of Dividend Investing combines several of the criteria above to find high quality businesses trading at fair or better prices that have a long history of rewarding shareholders through dividend increases. Examples of highly ranked businesses include:

  • Coca-Cola (KO)
  • Abbott Laboratoires (ABT)
  • General Mills (GIS)
  • J.M.Smucker's (SJM)

Investing in high quality dividend growth stocks is an excellent way to generate a passive income stream that grows over time. Historical financial studies show that dividend growth investing has not only been profitable, it has outperformed the market in the past. Dividend growth investing requires a long-term outlook and a bit of research to find stocks with durable competitive advantages. The Dividend Aristocrats Index is an excellent place to begin looking for high quality dividend growth stocks.


  1. Great argument in favor of dividend investing. I think anyone who isn't interested in stocks would do well to hold a few index funds and forget about it, but personally when I look at indivual stocks, it's one of the first things I look for.

    1. Ryan,

      For those that want to take a more passive approach then index funds make perfect sense. I still invest in index funds even though I'm a dividend growth investor. Although that's for my super long term retirement investments, 401k, rollover IRA...

      Thanks for stopping by!

  2. Thanks. For someone who doesn't want to spend much time looking into stocks, index funds can be a great way to go. If you are interested in a high quality dividend growth index, look at the Vanguard Dividend Appreciation ETF, VIG.

    1. Ben,

      Thanks again for the post. I've never looked much into the dividend growth etfs but I know a lot of people prefer them due to diversification plus it's a lot more handsoff.

      Thanks for stopping by!

  3. There is no question that investing in any of these high quality companies is a good idea for future retirement income. Growing and compounding dividends are the name of the game as a dividend growth investor and being such an investor means having a long term mind set and the conviction to hold your great businesses through rough stock slides. Thanks for sharing.

    1. DivHut,

      Completely agree for those that want to put in the time to research and keep up to date on the companies they own or want to own. Dividends are great since they are always a positive portion of return and when they grow organically that's even better.

      Thanks for stopping by!

  4. I really like these points, I find it interesting that the combo of High Yield and Low Payout Ratio are the winners. Is that maybe because of a higher dividend growth rate?

  5. Nice post PIP and completely agree on the points. Solid dividend paying stocks definitely helps in building consistent and increasing income over the long term.


  6. Hmmm, been awhile since I've seen JSM recommended.

  7. Great post, totally agree. Model portfolios support this and personal experience provided returns far in excess of what mutual funds, even the big name ones, could do over longer time horizons.