I recently wrote a not quite negative article on a high yield stock, where I discussed how a recent acquisition of a peer company would not help grow the dividend rate, so I thought the purchase would provide little if any benefits to investors in the stock. One commenter asked: “I do not understand why a 9% yield has to be increased to make a good investment?â€â€¦ writers act like this yield has no value. Even if the 9% yield can be maintained for the next 25 years.†This question is a good starting point for the list of reasons why you should buy and own dividend stocks that are expected to regularly increase their dividend rates.
Fight Inflation: Possibly one of the greatest benefits of dividend growth is earning an income stream that increases over the years. This last weekend I went to buy a car battery for the first time in about 10 years. At Walmart a plain old run-of-the-mill battery set me back $112 bucks! I am pretty sure the last time I bought a battery it cost about $60. That 9% discussed above is a great yield now, but 10 or 20 years from now, the dividend will buy half or a third of what that cash will purchase today. You can find higher-yielding stocks that will still be expected to increase distributions by 2% to 3% per year. Drop down to the 4% to 6% yield range, and you can buy into 5% to 10% annual distribution growth. Don’t lose to inflation by owning stocks that do not grow the dividend.
Safety of Income and Principal: A company that pays a large dividend for a high yield on its stock doesn’t increase the dividend for only one reason: It can’t. For whatever reasons, the company is not able to grow free cash flow per share enough to increase the payout to shareholders. The lack of dividend growth shows a company living on the edge, and any negative event could reduce the free cash flow and the next thing you know, the dividend gets cut. And dividend reductions produce more than a loss of income.
