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If you’ve been reading this site for long, you are aware that I believe dividend growth investing is the best strategy for building long term wealth.
Dividend Stocks Outperform Other Stocks
There are many studies available demonstrating that dividend stocks have experienced superior results over time compared to their non dividend paying counterparts.
If you saw my dividend growth video I created earlier this month, you would have saw a chart showing that from 1970 through 2010, S&P 500 dividend growth stocks performed at a compound annual growth rate of 9.27% compared to 1.82% for non dividend paying companies.
In fact, according to research from money management firm WisdomTree, 97 percent of the stock market’s total return from 1926 through 2008 was attributed to dividends.
In the book, The Future for Investors: Why the Tried and The True Triumph Over the Bold and the New by Wharton business school professor Jeremy Siegel, the author took a look at stocks throughout the S&P 500 to see which provided the best returns when dividends were reinvested. From 1950 through 2003, the four best performing stocks in the S&P 500 were all dividend growth stocks including Kraft Foods, R.J. Reynolds Tobacco (now Reynolds American), Exxon Mobil and Coca Cola. All 4 companies grew with annual returns above 14 percent.
Clearly, it has been demonstrated over and over again in research and by individual investors achieving financial success through the dividend growth strategy, that dividend growth companies make the best investments.
What Makes Dividend Growth Companies Such Great Investments?
It’s been shown through research that dividend stocks make great investments.
What I want to know is why.
Why do dividend companies tend to outperform over the long term their non dividend paying counterparts?
I’ve been thinking about this recently. And while there are many great reasons to invest in dividend growth stocks (power of compounding, growing passive income and many other reasons to love dividend growth stocks), I believe there is one overwhelming trait often demonstrated by dividend growth companies that causes them to be the best companies to invest in when building long term wealth.
What is it? Well it’s certainly nothing revolutionary. However, it is something that many investors often forget about when they get caught up in the bright story of many new shiny companies.
Here it is. Profits. Not just profits but growing profits. Growing investor profits year after year over time.
Simple but powerful.
If you look over the financials of the companies that Seigel found to offer the best return (Exxon Mobil, Coca-Cola, etc.), you will find a consistently growing earnings per share trend over the long term. If you look at many of the best dividend growth companies, you will find the same consistently growing earnings per share trend.
Growing profits is the driver of wealth. Over time, as profits grow, the company will be valued higher and higher by the stock market. Over time, as profits grow, the company will have the ability to pay out higher and higher dividend income to their shareholders.
In other words, growing profits drives every reason the dividend growth investor loves investing in dividend growth stocks for in the first place.
Companies that aren’t growing profits consistently will be unable to consistently grow their dividend payments to shareholders. Companies that aren’t consistently growing profits, will be unable to grow in value, over the long term.
So what makes dividend growth companies such great investments?
Dividend growth companies are such great investments because in order for a company to begin and continue paying a growing amount of dividend income to shareholders over many many years, that same company must be able to grow their bottom line (their profits) over many many years.
And companies who grow their profits over many many years will grow to be worth more and more money. Those same companies will offer investors the superior total return results that manifest into long term wealth for shareholders.
So, dividend growth investing is the best investment strategy because dividend growth companies are the best companies in the world.
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