Why Investing for Dividend Growth Keeps Working Great

Accelerating Dividends, Income Investing

As earnings season winds down, a review of the stocks recommended through my newsletters that my subscribers received a lot of excellent dividend news. Dividend growth generates annual total returns that work through the market cycles—no timing required.

A couple of recent examples illustrate my point – and show how you can get in on this great strategy, too…

A dividend growth strategy involves buying shares of stocks where the company regularly—usually annually—increases the dividends it pays to shareholders. If you calculate the average annual total returns of dividend growth stocks, you will find that over the long term, you get a compound annual growth rate that comes very close to the average dividend yield plus the average dividend growth.

Dividend increases can also help a stock price in the shorter term. Last week we saw a dramatic example.

On Tuesday, March 7, the Dow Jones Industrial Average closed down 575 points, and the S&P 500 dropped by 1.5% for the day. That day, Dick’s Sporting Goods (DKS) gained over 11%. Dick’s released fourth-quarter earnings showing excellent results. A significant factor for the share performance was the fact that the company more than doubled the quarterly dividend going from $0.4875 per share to $1.00. The boost also doubled the yield to 3.0%.

Before the big increase this year, the DKS dividend had been growing by more than 20% per year. Investors have seen a 380% total return over the last five years. I suspect the growing dividends had something to do with those great returns.

In February, the Federal Agricultural Mortgage Corp (AGM) increased its dividend by 16%, going from $0.95 to $1.10 per share. Through most of the first quarter, when the broader market was up about 4%, AGM appreciated by 26%. The AGM dividend average growth for the last decade was 20% per year, meaning investors in the stock enjoyed a 400% total return for the ten years.

I hope boards of directors realize that few things help a share price more than meaningful dividend increases. Share buybacks are a hot topic these days, but I think returning cash to shareholders as growing dividends produces better returns for those investors.

I employ a dividend growth-focused strategy with my Monthly Dividend Multiplier service. I provide a model portfolio and track the returns. The portfolio consistently outperforms the S&P 500.