What is dividend growth investing and how do I start?

Dividend investing involves investing in stocks that pay dividends. Dividends can be a source of income for investors, they can also point to solid, growing companies whose shares could make a sound investment.

And dividends have been a popular investment strategy for decades — but it can be difficult to research, know which companies to invest in, or which products might be worth investing in.

Before diving into what dividend investing is and why it’s a smart strategy, you need a platform to invest on. Check out M1 Finance. They are a commission-free platform that makes it easy to build a dividend investing portfolio. View our M1 Finance report here.

What are dividends?
Dividends are payments to registered shareholders on a specific date approved by the company’s board of directors. Dividends are a method of returning a portion of the company’s profits to shareholders.

Dividends are usually paid in cash and are usually expressed as an amount per share. For example, a dividend payout might be $1 per share. Dividends may be paid at any frequency determined by the company’s board of directors. Quarterly payments are common, especially for established companies.

Stock dividends can be paid in addition to cash payments. In this scenario, shareholders receive a set number of shares for each share held.

Dividends are an integral part of returns
Dividends may seem insignificant at first, but historically they’ve accounted for a significant portion of the total return of the S&P 500¹ and other major stock market indexes.

A study of the impact of dividends on the S&P 500 Index from December 1960 to December 2018 showed that 82% of the index’s total return was due to reinvested dividends and the power of compounding over that 50-year time horizon.

They assumed that a hypothetical² investor had invested $10,000 in the index on December 1, 1960 (note that you cannot actually invest in the S&P 500 Index, although there are numerous ETFs and mutual funds³ that attempt to do so to replicate the performance of the index).

If all dividends received were reinvested and compounded over time, the hypothetical investment of $10,000 would have grown to $2,459,158 as of December 20, 2018.

Without the reinvestment of dividends, $10,000 would have grown to just $431,397 over a roughly 50-year time horizon based on stock appreciation alone.

Looking at the percentage contributions of dividends to the index’s total return per decade makes the importance of dividends even clearer.


Percentage of Total Return — Price Appreciation

Percentage of Total Return — Dividends




























The decade of the 2000s brought negative total returns for the S&P 500 Index.

Certainly, the pendulum has swung back and forth between dividends and share price appreciation as a source of returns for stocks in the S&P 500 over various periods of time.

In the decades of the 1980s and 1990s, for example, a number of stocks experienced strong price increases. In the 1970s and 1940s the tables were turned. Dividends accounted for over 40% of the index’s total return during the study period.

Dividend yield versus dividend growth
Dividend investors typically look for dividend stocks for one or both of two reasons.

dividend yield
Dividend yield is calculated by dividing the stock’s annualized dividend payout by the current stock price. For example, at a current stock price of $50, a stock paying an annualized dividend of $2 per share would have a dividend yield of 4%. If the price increased to $56 per share, the dividend yield would drop to about 3.6%. The payout didn’t change, but the increase in the stock price would serve to lower the current dividend yield.

The commonly used annualized dividend payout is the last quarterly payout times four. The dividend yield generally changes daily as the stock’s price moves.

A high dividend yield can be a function of both an increased payout and a fall in the stock price.

When looking for high-yielding stocks, it’s important that investors look beyond the dividend yield to make sure they understand why the yield is high and whether the dividend payout is sustainable.

One sector whose stocks often boast high yields is utilities. They have stable cash flows and often have a monopoly position in their region. While the stock price might not move much unless there’s an unusual event, dividend payouts are often pretty stable.

That’s not the case for all stocks with high dividend yields. Retailer Macy’s (Ticker M) recently had the highest dividend yield of any stock in the S&P 500. The dividend per share has been steady at $1.51 for three years. However, the price per share has fallen from a high of over $67 per share in late July 2015 to a current price per share of $15.54. Macy’s could be a good buy at the current price and yield, but it has certainly disappointed longtime shareholders.

dividend growth
Another approach to dividend investing is to look for stocks in companies with solid balance sheets in increasing their dividend payout per share each year. Companies that do this are generally well run and financially healthy.

The ability to maintain and increase the dividend payout each year is a sign that the company is growing its bottom line and generating solid cash flows.

Whether you invest in high-yield companies or those with growing payouts, dividend investing can be a solid way to generate an income stream from your portfolio. For example, this could be a source of passive income as you approach retirement.

S&P 500 Dividend Aristocrats
Prime examples of dividend growth are stocks in the S&P 500 Dividend Aristocrats. Dividend Aristocrats are defined as stocks included in the S&P 500 Index that have increased their dividend payouts at least annually for at least 25 consecutive years. The first list was published in 1989 and included 26 companies.

According to website Dividend Value Builder, there are currently 57 companies that qualify as Dividend Aristocrats as of 2019.

If you stop and think about it, the ability to pay a dividend for even 25 straight years indicates a company with strong earnings and cash flows. Increasing the dividend payout for 25 or more straight years is a sign of a company that is profitable, growing, has solid cash flows, and most likely is a well-run organization.

A look at the current list of Dividend Aristocrats reveals a who’s who of the top companies, including a number of household names.

Dover Corporation (ticker symbol DOV) tops the list with 63 consecutive years with at least one annual dividend increase. Dover is a diversified US manufacturer that manufactures products organized into three divisions: Engineering Systems, Fluids, and Refrigeration & Food Equipment.

Three companies rank second with 62 consecutive years of at least one annual dividend increase:

Emerson Electric (ticker EMR) is an American multinational company and a member of the Fortune 500 list. The Company manufactures products and provides engineering services to a wide variety of consumer, commercial and industrial customers.
Genuine Parts Company (Ticker GPC) is engaged in the distribution of automotive replacement parts, industrial replacement parts, office supplies and electronic materials.
Procter & Gamble (Ticker PG) is a large consumer goods company with such well-known brand names in areas as baby care, fabric care, personal care, hair care, shaving and many others.
Rounding out the top five Dividend Aristocrats is another well-known brand, 3M (ticker MMM), which has had at least one annual increase in its dividend payout for 60 consecutive years. They sell any number of consumer and office products like sticky notes. Beyond this product, they offer products in occupational safety, industrial products, healthcare and consumer products.

Ways to invest in dividend stocks
For investors interested in dividend investing, there are a number of options to consider. Note that none of these are mutually exclusive, investors can mix and match any of these in their overall investment strategy.

Individual Dividend Stocks
Investors can buy individual dividend stocks. Whether this is a good strategy or not depends on each investor’s individual situation and investment strategy.

A key consideration is whether or not you can build a diversified portfolio of individual stocks this way.

There are many investors trying to build an income stream by building a portfolio of individual dividend-paying names. It’s important to note that even dividend stocks are vulnerable to stock market movements, although many are less volatile than the market as a whole.

So let’s say you open an account with M1 Finance to build your dividend-paying stock position. I would also recommend investing in other asset classes or mutual funds to diversify your portfolio.

mutual funds and ETFs
There are a number of mutual funds and ETFs that focus on dividend stocks from either a dividend growth perspective or a yield perspective. Some examples include the following:

The Vanguard High Dividend Yield Index Fund (ticker VHDYX) seeks to track the performance of the FTSE High Dividend Yield Index. The companies held in the fund generally offer above-average dividend yields. There is also an ETF version of the fund. The fund’s most recent SEC return was 3.31% versus a return of under 2.0% for the S&P 500 index.
The Vanguard Dividend Appreciation ETF (Ticker VIG) includes companies that have increased their dividend payouts annually for at least 10 consecutive years. This fund focuses on dividend growth rather than yield growth. The fund is also available as a mutual fund.
There are several funds and ETFs that have some form of focus on the Dividend Aristocrats of the S&P 500. An example is the following:

The ProShares S&P 500 Dividend Aristocrats ETF (Ticker NOBL) invests in an index composed of 40 S&P stocks. The fund weights these 40 positions equally and rebalances the fund four times during the year. The composition of the 40 stocks is reviewed once a year and revised if necessary.
Dividends are an important part of stock returns. Companies that can continue to pay dividends annually can be excellent investments, especially those that are able to consistently grow their payout levels.

It’s important for investors to understand the underlying financials of any stock they may be considering to ensure the company is a sound investment for them. Make sure the dividend is sustainable. It’s also important to realize that even dividend stocks can get hit if the stock market corrects itself.

Mutual funds and ETFs that focus on dividends can be a good alternative. Make sure you understand the fund’s objectives and its expenses. Make sure these goals align with your investment goals.

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