An investment strategy of buying stocks with growing dividends has produced positive results for many investors. Investors searching for dividend stocks use different search tools and evaluation criteria to pick stocks when compared to growth stock investors. An advantage for dividend investors is the ability to still earn from a stock portfolio even when the market is down or flat.
Stock dividends are a portion of company profits paid out to shareholders. Each corporation must decide whether to pay dividends and then at what level the payouts should be. Some companies pay out the majority of profits as dividends. These stocks usually have a high yield when the dividend is expressed as a percentage. Other companies have a policy of attempting to increase the dividend as company profits increase. The dividend growth investor will pass over high-yield stocks with fluctuating dividends in favor of stocks with lower yields but an rising dividend payout.
To evaluate stocks using a increasing dividend approach, several financial measurements forecast the rate of payout increase and stability of the dividend. First, a company should have a history of increasing net income per share. The dividend comes out of the net income, so an increasing dividend needs increasing earnings. Next, the payout ratio is the amount of net income paid as a dividend. A lower payout ratio means the company has more room to grow the dividend even if profit growth slows or reverses for a period of time. Another calculation is the actual rate of dividend increases. Compute how fast the dividend has increased over the last several years.
There are two available lists of stocks with histories of steadily increasing dividends. The Dividend Aristocrats from Standard & Poor's includes all of the companies that have increased their dividend for at least 25 consecutive years. The approximately 40 stocks on the list as of publication include some of the best-known companies in the U.S. The Dividend Achievers list is maintained by Mergent Inc. and includes stocks with a 10-year minimum of dividend increases. There are approximately 200 stocks on this list. Stocks making these lists are good candidates for continued dividend increases.
Dividend Yield vs. Dividend Growth
An investor must balance the current dividend yield with the dividend growth rate of a stock. One stock may be paying a 4 percent current yield and increasing the dividend at 5 percent per year. Another stock under consideration has a 2.5 percent yield but is increasing the payout at 10 percent per year. If the second company can maintain the pace of earnings and dividend growth, it will provide a better return over the long term. An additional benefit of a rising dividend distribution will be an increasing share price over time.
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