With 2016 being dominated by volatility, it’s not surprising that dividend investing has emerged as one of the most popular investing strategies. Dividends are major sources of consistent income for investors when returns from price movements of stocks are at risk.
Benefit of Dividend Growth
There are multiple styles of dividend investing out of which dividend growth is the most appealing. Stocks with dividend growth generally outperform their peers and generate increased profits year after year. Thus, the dividend growth strategy has an edge over the steady dividend strategy. By investing in stocks with dividend growth, investors can enjoy rising current income while awaiting capital appreciation.
Dividend growth stocks also provide some margin of safety, which enables investors to withstand shocks. In fact, stocks that have a strong history of dividend growth as opposed to those that have high yields form a healthy portfolio.
Moreover, these stocks often have superior fundamentals compared to other dividend paying stocks. This is because dividend growth is often an outcome of a sustainable business model, a long track record of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics.
Here are the screening parameters that could result in a winning dividend growth portfolio:
5-Year Historical Dividend Growth greater than zero:Â This selects stocks with a solid dividend growth history.
Most Recent Payout Ratio less than M-Industry: This is the measure of dividend payments as a percentage of earnings. A relatively low payout ratio indicates the company’s ability to increase dividend even during tough times. Â
5-Year Historical Sales Growth greater than zero:Â This selects stocks with a strong record of revenue growth.
5-Year Historical EPS Growth greater than zero:Â This shortlists stocks with a solid earnings growth history.
