Introduction to Dividend Growth Investing

By | 2016-10-12

The most common style of investing the FIRE community recommends is index investing; it’s simple, low cost and easy. But there’s another style of investing that works well for a section of finance bloggers; Dividend Growth Investing (DGI).

I invited Tristan and Jasmin from Dividends Down Under to do a guest post on Dividend Growth Investing – Head over to their blog and check it out! – MR. AE

What is Dividend Growth Investing?

Dividend Growth Investing is simply buying individual stocks of companies that give growing dividends, even throughout recessions.

We’ve all heard of compounding – it’s one of the most boringly exciting things in the financial world. With DGI, the aim is to build a growing snowball of dividends until the income surpasses your desired expenses in retirement / financial independence.

If you choose your stocks wisely, your portfolio could pay you increasing dividends for the rest of life (faster than inflation) – your standard of living could increase as your retirement goes on.

Could you give a quick example of how that works?

For example you’ve built up your portfolio to be $1M in size and decided your desired annual expenses are $30,000 in retirement. If your $1M portfolio has an average yield of 3%, it’s going to pay you $30,000 in the first year. Great! That’s what you wanted. However, if your portfolio is full of DGI stocks that increase their dividends each year, you could (conservatively) expect a 4% increase overall each year. In the second year you’d get $31,200. In the third year you’d receive $32,448. This way, you never have to draw on your capital.


What are some typical DGI stocks?

(These are not recommendations, just examples of the type of companies that DGI bloggers buy).

Depending on what region of the world a blogger hails from, the potential DGI stocks differ in dividend history. As we’re DGI bloggers from Australia, I’ll give you two Australian examples: Ramsay Health Care (a private hospital operator) which has been growing its dividend consecutively since 1999. The other example is Invocare (a funeral and cemetery operator) which has been growing its dividend since 2005. If you owned these shares during the 2008 crash, and just focused on the dividends, you wouldn’t even know a crash happened.

Growing a dividend for 17 years straight is impressive, but North American companies have far more impressive records. There’s a list called the ‘Dividend Aristocrats’ that have been growing for at least 25 years. Some instantly recognizable names include:

  • AT&T – increasing since 1985
  • McDonalds – increasing since 1977
  • Pepsico – increasing since 1973
  • Target – increasing since 1968
  • Walmart – increasing since 1975

There’s an even more prestigious list called the ‘Dividend Kings’ that have been growing for at least 50 years. These companies have been growing dividends before a lot of us were born! A few examples:

  • Coca Cola – increasing since 1963
  • Colgate Palmolive – increasing 1964
  • Johnson & Johnson – increasing since 1963
  • Proctor & Gamble – increasing since 1957

I am completely jealous of the companies North Americans can invest in. But, I’d stress that it’s important to not blindly start buying stocks. Have a look at what other people are doing and how they approach DGI investing.

What are some good DGI resources?

Other than dividend growth, what are some other advantages?

Growing dividends for over 25 years would suggest the company has also been growing its profits for over 25 years – making them some of the most reliable companies in the world. A company has to be really good at what they do to grow that long.

Dividends are a more stable part of total returns, and are always positive. Receiving actual cash is much more ‘solid’ than a constantly changing share price. Dividends can give you that piece of mind.

Dividend aristocrats have been very successful at growing their share prices too, as successful as the S & P 500. Not only is the income increasing, your nest egg should hopefully increase too.

By investing in individual companies, you can take advantage of certain stocks if they’re ‘cheap’, but the rest of the market isn’t. The Wells Fargo recent banking scandal has hit their share price, so some DGI investors have used that as an opportunity to buy.

What are some of the things that DGI investors look at?

Good diversification is key. This means having many companies across a broad range of industries and geographies. For example, having a portfolio of just Pepsi and Coca Cola would be terrible diversification by industry – but at least their products are sold in (probably) every country in the world – which is good geographical diversification.

Profit/earnings growth – Companies that grow their earnings over the long term should keep paying out higher dividends and grow in value. Quality companies will usually have a strong brand and quality product – this allows them to increase their prices without any negative effect to their sales.

Sustainable growth – A company can only increase its dividend so much before its unsustainable. A good thing to look at is a company’s payout ratio (how much of its profits are paid out as a dividend). If a company has a 60% payout ratio, or less, it gives it more leeway to keep increasing the dividend if it has one bad year. It also means the company is re-investing more of its profits back into itself for future growth.

Business idea – The business idea behind the stock also has to make sense. Even if a stock has been growing its dividend for 25 years, it doesn’t mean it’s going to grow for another 25 years. You need to look at the big picture for each business too, not just the numbers. For example, cigarette and oil companies will probably find it difficult to keep building their profits over the long-term.

Buying price – No business is ‘buy at any price’, including dividend kings. If you overpay for your stocks then you could have paper losses for a long time. It’s up to you to decide what ‘overpaying’ is – perhaps you’ll only consider stocks with a dividend yield over 2.75%. There are many different ‘screeners’ that DGI investors use.

Final thoughts

I’ve only just scratched the surface of dividend investing. I hope it was interesting and you can see why some people invest purely in DGI stocks. Being able to grow your dividend income, potentially for decades, is very appealing – which is why we follow this investment strategy too.

Readers – do you use the DGI strategy for your investing?

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32 thoughts on “Introduction to Dividend Growth Investing

  1. Dividends Down Under

    Thanks for having us on your blog AE :). Hopefully your readers enjoy Tristan’s introduction to DGI – it’s such a huge topic, so hard to cover it all!


    1. Apathy Ends Post author

      Thanks for putting this together! Its a great overview – I appreciate it!

  2. TJ

    Nice overview!

    I’m a pretty lazy dude, but I really like the concept of DGI, so what I’ve actually done is outsourced the stock picking by using some cheap actively managed mutual funds that incorporate strategies similar to this. Any dividend-focused mutual fund is going to have anywhere from 40 to 200 individual stock holdings contained within it, so it’s certainly going to be diversified enough if it were to be a single holding.

    I feel like my strategy is the best of both worlds! I get to be lazy AND have a professional strategically pick strong high quality companies, but there are many who would consider my strategy to be the worst of both worlds….that you should use passive broad market index funds if you want to be lazy or you should do your own diligence and select individual stocks and cut out the middle man. It’s my opinion that it’s absolutely reasonable to be somewhere in between. 🙂

    1. Dividends Down Under

      As long as it works for you TJ, and you get what you want, then it’s right! I wouldn’t mind that solution, but that wouldn’t be any fun 🙂


  3. Jon @ Be Net Worthy

    Tristan (& Jasmin), thanks for the nice primer on DGI stocks and investing. I’ve been intrigued by DGI for a while, but still can’t get over the current valuations like you said. I think that another benefit of DGI investing, at least in the U.S., is that qualified dividend payments receive favorable tax treatment. I’m not 100% sure of the rules, but if anyone has any insight into that, I’m sure I’m not the only one that would be curious to know.

    Thanks again for sharing, I may have to put “start building a DGI portfolio” on my to do list for 2017!

    1. Dividends Down Under

      DGI is definitely worth considering, Jon 🙂

      There are some great tax benefits to dividends. In Australia, there’s franking credits

      Tawcan did a good run down on Canadian taxes:

      I’m sure someone has done an American one too, can’t think of one off the top of my head though.


  4. Dividend Growth Investor

    That is a pretty nice article on DGI Mr Dividends Down Under. I enjoyed it. DGI is a strategy that benefits those who are patient to build a diversified portfolio of quality names and basically sit on it for decades.

    Keep up the good work!


  5. G
    Graham @ Reverse The Crush

    Great post DDU,
    A really good overview of DGI.
    I like how you mentioned the payout ratio. That’s an important one for me.
    I definitely use DGI as a strategy. Even though I’ve dabbled in some crude oil trading, DGI is my primary investing strategy. I do think that I will adjust my strategy slightly going forward though. I want to have several index ETF’s, a DGI portion, and some for growth. The only growth I want to invest in right now is Snapchat and maybe Tesla. Maybe some other tech. This would only be a small portion of more speculative money though. Thanks for sharing:)

    1. Dividends Down Under

      Thanks Graham – glad you liked it! Everyone loves the payout ratio, it’s super important!

      Glad that you’ve worked out a strategy that works well for you, and I’m glad DGI plays a big part in that.


  6. Mr. PIE

    I have always been curious Tristan but never executed a full blown strategy on DGI. Among our numerous index funds we do own VDIGX, Vanguard Dividend Growth index fund. Nice performance with average annual return of 8.3% over last ten years. The SEC yield is a little lower at 2% than some other dividend funds. Passive index investing is where we are focused and happy with it.

    Nice to see you guest posting for AE. Congrats to both of you for getting it together with this guest post.!

    1. Apathy Ends Post author

      Gotta pull the Pros in when I’m not one! 🙂

    2. Dividends Down Under

      There are many ways to skin and cat and I’m glad we’ve all found a strategy that works for us 🙂 Indexes will play their part in our investing too!

      I really appreciated his invitation – and I enjoyed writing this post.


  7. Financial Slacker

    Great overview!

    I’ve been a fan of index investing for a long time, but I’m starting to come around to the dividend growth investing approach. Sites such as yours and the others you mentioned are great resources.

    And you’re right to take a look at Wells Fargo. They’ve been a long-time player in the dividend world. Not sure if there’s more bad news to come, but with their CEO resigning, they appear to be ready to mend their public image.

    1. Dividends Down Under

      Thanks FS 🙂

      There are positives and negatives to both approaches, and both work. It is funny how big scandals end up being forgotten about with time, this is no different.


  8. Miss Mazuma

    My 90 year old grandpa is a huge dividend investor and has been for many many years. Though I haven’t seen his portfolio (money is taboo in our fam) he has all the big guys and I know it is well into the 6 digit range. Grandpa is a modest guy who made a modest living as an ad salesman for the yellow pages. He was also the sole financial supporter of grandma plus 4 kids. There has to be something to dividend investing!!

    I have been on the index fund bandwagon and have only a few individual stocks in my portfolio. After reading this I think it’s time to branch out. Thanks for the info, DDU!!

    1. Dividends Down Under

      Sounds like your grandpa was a wise old owl, invested in dividend paying blue chips and now he’s rich. There’s nothing wrong with having both strategies work side by side 🙂


  9. Josh @MoneyBuffalo

    I mostly have index funds and a few dividend funds. It seems like some brokerages give them a bad rap (for reduced earning potential) and best for near-retirement, which is why I stayed away from them for a while and initially started with actively managed funds. But, after working for a large corporate company that bragged about raising their dividend every year for a long period of time I slowly got on the dividend band wagon about two years ago now.

    1. Dividends Down Under

      There’s no one ‘right’ way to invest – who knows what’s going to perform best? You just have to go with what you’re most comfortable with 🙂


  10. Finance Solver

    Dividends investing.. Fantastic way for a passive income stream. Great point about the buying price. When I buy index funds, I pay zero attention to the price (I make sure to buy on a red day, but that’s about it) and buy it because I believe in long term returns of 7% no matter when I buy (there are exceptions to the rule though). Can’t really do that for dividend stocks though!

  11. Ricard Torres @ Escaping to Freedom

    Great introduction to Dividend Growth Investing! I love DGI, as it’s such a robust long-term strategy to reach financial independence. The fact that quite a few companies have increased their dividend every single year for many decades – even through wars and severe economic recessions – makes me feel very calm ad certain with this strategy.

    I would also add David Fish’s list of Dividend Champions (companies with 25+ consecutive years of dividend raises) to the list of resources: I have found it extremely useful over the last few years!

  12. D
    Dennis@ NestEggRx

    Interesting article – thanks.

    I think too many people focus solely on growth without giving much thought to developing yield. Personally I prefer real estate as it allows me to have both.

  13. Mr. RIP

    What an AMAZING article about DG!
    I admit I didn’t know this stuff and now, well… now I know.
    It doesn’t mean that I agree with that though. I’m still skeptical: what’s the “cost” in terms of opportunities for a DG company?
    I mean: say we have 2 companies, one issues dividends and the other doesn’t. Which company is going to grow more? I guess the second one, since dividends are a terrible loss for the company itself. How much a policy of dividend growing had costed to the company while 200-2002 and 2008 happened?

    Example of company of class 1: AT&T
    Last 10 years: +8.48%
    Example of company of class 2: Google.
    Last 10 years: +241%

    Took 2 random companies, didn’t cherry pick them. In class 2 you also have Tesla (+920%, in 5 years), Berkshire Hathaway (+110%), Amazon (+1970%)

    My comment is valid not just for DG stocks, but dividend stocks of any kind.

    Forgot to mention that in Switzerland, where I live, dividends are taxed while capital gain is not. Another reason to not go with DG strategy.

  14. P
    Paul Andrews

    I was pretty much going to write the exact same thing Mr. RIP said above: I get the concept, but I’ve always questioned why dividend growth investing is such a huge thing on personal finance blogs now. I’m not saying it’s not valuable, or that you don’t have great insights. I’m just saying that normally risk tolerance is higher when you’re younger, and investing in “safe” companies means that younger folks will lose out on a lot of the growth that happens in small cap stocks, which tend to not pay dividends. Not trying to start up some beef, just wondering what your thoughts are regarding risk/age in terms of dividend investing. Great post!

    1. Apathy Ends Post author

      I won’t speak for Tristan, but I personally don’t do DGI right for the reasons you mention. I invest a decent % in the small/mid cap vanguard funds in our 401ks. And will continue to do for the foreseeable future.

      That being said, I think DGI is great for people that want to build a passive income stream for retirement. I also don’t know what the options/markets are like in other countries for small/mid cap investments (a good chunk of the dgi bloggers I read are outside the US)

      Definetely something I will look into as we get closer to retirement, probably not with 100% of our portfolio but a chunk big enough to bring a meaningful amount of cash in

  15. Z
    ZJ Thorne

    I’m fascinated by DGI, but until I have more time to really learn about appraising companies, I’m sticking to Index Funds. Thanks for a great primer.


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