I believe dividend growth investing is one of the best investment strategies available. There are many reasons I like dividend growth companies and today I wanted to highlight some of what I feel to be the biggest draws towards dividend growth stocks compared to other investment options. Here you’ll find my top 10 reasons that dividend growth stocks are my favorite type of investment.
- Dividend growth companies tend to be great businesses. Companies who have demonstrated the ability to increase dividends year after year for quite a few years (minimum of 5) are doing something right. Look at many lists of dividend growth stocks and you’ll find many blue chip, solid industry leading companies who have been not only increasing dividend payments but earnings for many years in a row.
- Income from dividend growth stocks can outpace inflation. When looking for stocks to invest in I look for stocks that have a reputation for annually increasing their dividend payment at a rate higher than inflation. This means that when I am living off of my dividend income, that income will at least keep pace with inflation. As my expenses rise due to inflation, so will my income causing me no concern about being able to cover my bills.
- Dividends can have a compounding effect on your wealth. During the accumulation phase of investing I am using my dividend income to buy more shares of dividend growth companies. As time passes I will be receiving dividend payments on shares that I purchased with previously earned dividends. In effect I will be earning dividends on my dividends. This is compounding and nothing can boost your wealth over time like the effect of compounding income.
- Dividend income can pay my bills. Eventually I will reach my goal of earning enough dividend income to cover my daily living expenses. At this point I can choose to collect my dividend payments in cash rather than reinvesting them. I can then use that cash to pay all of my bills and I will no longer have to go to a job in order to earn money. When you don’t need to rely on a job to earn money to pay your bills, but instead can afford to cover those expenses with dividend income, this is what I call financial freedom. Dividend growth can help me reach financial freedom.
- Dividend income keeps me from making stupid mistakes. There is alot of volatility in the stock market. Prices will go up sometimes and prices will go down. As an owner of stocks you must be willing to sometimes experience large price declines. When stock prices are dropping it is easy to think that you need to sell your stocks before you have nothing left. However, if your main focus is on dividend income then this can give you a pause. Dividend income can help you get through the hard times when you might be tempted to sell. As long as the underlying business of the stock you own is still good and strong there is no reason to sell just because it may fall slightly out of favor with the market.
- Don’t have to sell off assets (shares of stock) in order to generate cash. If you own investments that don’t pay out an income then in order to pull out cash to pay your expenses you will need to sell some of those investments. Dividend income allows me to continue to own my stocks while still paying me an income to meet my expense requirements. I will never have to sell my stocks if I don’t want to.
- Dividend growth is a positive sign from a companies management. Typically if management is raising a dividend rate it is because they feel good about the future prospects of the company. They believe they will have the profits to support a higher dividend payout. The last thing management wants to do is have to decrease the dividend because this will negatively affect the stock price. I believe most managements are conservative with their dividend increases so they will not be forced to have a cut in the future. However, this is not always the case. Make sure you do your due diligence as to the safety of the dividend before investing.
- Dividends continue to grow even during recession or stock price declines. There are companies out there that have increased their dividend for 20, 30 and even 50 years or more. They continued to grow their dividends right through the bear markets of the 80′s, right through the bursting of the dot com bubble and right on through the recent financial crisis caused by the housing bubble. Owning shares of companies who are able to continue to do well through recessions, despite what stock prices may be, makes me very pleased. You can feel good that your companies are doing their jobs and the stock price will recover once the economy gets back on track.
- Dividends are taxed at low rate for most taxpayers. In the United States, qualified dividends are taxed at a lower tax rate than the regular income tax rates. This means I get to keep more of each dollar of my dividend income compared to earned wages and interest. I can then use these dividends to buy more investments to make more money in the future.
- Dividend income is passive income. Possibly my favorite reason to own dividend growth stocks is because dividend income is passive. My goal is to eventually accumulate enough shares of dividend growth companies that I will be able to cover all of my living expenses with the dividend income I am paid. I no longer will have to work to be able to meet my obligations. I will be able to do whatever I want whether that is travel, golf, watching sporting events or sitting at home playing video games and watching movies. Monday morning will come and rather than having to go into the office, I will be able to wake up and decide to do whatever I want. That will be because no matter what I decide to do, my dividend stocks will be doing their job and paying me a passive income.
There you have it. These are my top 10 reasons for owning dividend growth stocks. What is your favorite reason for liking dividend growth investing? Please share your thoughts in the comments below!