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How are you different from everyone else?
For investors with a dividend focus, this question is of paramount importance right now.
That’s because today’s low-interest-rate environment has greatly increased the popularity of dividend strategies – and as a result, capital flows into dividend stocks and ETFs have broadly inflated valuations, pushing down expected returns.
Many large-cap dividend payers with high earnings quality have become very expensive relative to the broader market. Indeed, more than a few Dividend Aristocrats fall into this category.
Worse yet, many have adopted the faulty – and reckless – view that dividend stocks can act as bond replacements.
Thus, we clearly need a unique approach. To be successful, we need some kind of competitive advantage…
The Power of Dividend Growth
In a world desperately reaching for yield and focusing on consecutive years of dividend increases, the magnitude of dividend growth remains an underutilized metric.
I’ve shown dividend growth back-tests, but real-world examples are often more compelling.
In February 2014, I brought the 133% dividend increase at FBL Financial
 (FFG) to everyone’s attention. This small-cap insurance company was flying under the radar, even after its monster dividend hike and stock buyback announcement.
Well, since my mention, FFG is up 59.7% on a total-return basis (dividends reinvested).
The other, well-known insurance stocks (with far lower dividend growth) have effectively gone nowhere. MetLife (MET) and Aflac (AFL) are up 2.5% and 3.3%, respectively. Prudential Financial (PRU) is actually down 2.7% over the past 14 months.
The dramatic outperformance of FBL Financial, a seemingly boring life insurance company, illustrates the power of dividend growth.
Through a large dividend increase, a company’s management is signaling that it’s highly confident in the underlying business and ability to generate ample free cash flow (operating cash flow minus capital expenditures).