Investors looking to diversify their portfolio, hedge against market downturns and inflation, or potentially generate passive income may turn to dividend growth investments. The companies offering these types of stocks are often recognized as being stable, low volatility, and even having a positive future outlook. As with any investment, however, dividend growth stocks still come with risks and considerations to keep in mind.
What is a dividend?
A dividend is a portion of a company’s earnings that are paid out to shareholders. It is generally contingent on the company recognizing a surplus or profit, and is often paid on a scheduled basis, such as quarterly or annually.
These dividends may be paid in cash via a dividend check or as a credit with a brokerage of choice, or as additional shares of stock. If paid in cash, investors can reinvest it to purchase more shares or use that money elsewhere.
How does dividend growth investing work?
Dividend growth investing is a popular strategy with many investors. It entails buying shares in companies with a record of paying regular and increasing dividends. An added component is using the payouts to reinvest in the company’s shares—or shares of other companies with similar dividend track records. The goal is compound investment portfolio growth. Although dividend growth investments are generally recognized as low volatility, no investment (or dividend payment) is guaranteed.
Receive daily business and financial news
Calculating dividend growth rate
A stock’s dividend growth rate is a percentage-based equation that tells investors how much that stock’s dividends have grown over a period of time. As a company grows, it may increase the dividends paid to investors, which may indicate stability.
The dividend growth rate is calculated by dividing a stock’s annual dividend in any given year by the previous year’s annual dividend, then subtracting 1. For instance, let’s say a company’s current annual dividend is $2.20 per share, but last year the company offered $2.05 per share. The dividend growth rate would be 7.3%.
Dividend growth rate = [Current annual dividend / previous year’s annual dividend] - 1
To find the dividend growth rate over a range of years, simply average the individual dividend growth rate change for each year in question.
Dividend growth investing strategies
A dividend growth investment strategy can focus on the following:
- Companies with a history of consistent dividend yield growth.
- Diversification in companies in a variety of industries, limiting the effect of a decline in one sector.
- Buying and holding, because reinvesting dividends is meant to compound returns over time.
- Companies whose dividend yield growth is greater than, or at least equal to, the rate of inflation.
- Companies that “earn” their dividend and make payouts from current profits, not accumulated capital or debt.
Each investor will have their ideal approach based on individual goals, financial situation, and risk tolerance.
If you’re looking for a long-term investment strategy, we’ve got you covered. Titan’s award-winning, expert-managed portfolios offer investors of all income levels the potential to grow their wealth over the long-term. Why wait? Sign-up takes less than five minutes.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.