Through severe market and economic turmoil, companies with a long history of increasing their dividend payments have generated increasing income per share for their investors.
Consider the following hypothetical example, which we call the “Power of Five”: You invest $100,000 in a stock fund with a dividend payout of 3.5% that increases by 5% every year. You reinvest the dividends and the share price remains unchanged. Your first-year income is $3,500. Should the fund continue to perform as expected and increases the dividend payout 5% per year, your dividend income would more than double every nine years as shown in the example below.
• Dividend income increases to $7,921 in year 10.
• Dividend income increases to $24,972 in year 20.
• After 20 years, the total dividend payout would generate an annual return on your original $100,000 investment just under 25%.
Stock Selection Is Key To A Rising Dividend Strategy
Not all dividend stocks are created equal. As with any investment class, it’s important to establish strict criteria for selecting the securities that best match your profile and meet some standard of quality.
Chasing the highest yielding dividend stocks can be as risky as investing in junk bonds. Over the long term, companies with an established record of uninterrupted dividends, a clean balance sheet, and a positive earnings outlook, may outperform the higher-yielding investments in terms of both dividend income and capital appreciation.
We continue to believe that investing in stocks that have historically and consistently increased their dividends may provide an excellent opportunity for investors to produce growing and sustainable income.
Trey Welstad, CFA, is a portfolio manager at Integrity Viking Funds.