One tenant of my investing rules that hasn't changed is dividend growth. While I've bought several companies that pay small dividends, these same companies have a dividend growth track record of raising the dividend for at least several years. The importance of this rising dividend, not the actual dividend yield, is the subject of this post.
First, why do I care about the dividend? In one of my earliest blogs, I explored the effect of dividend growth on total return. Blog here: http://chumpmenudo.blogspot.com/2012/09/dgi-vs-no-dgi-scenarios.html
As the article states, it doesn't make a huge difference on total return (only around 20%-30%), it does provide income in retirement. But beyond this, I have come to believe that the discipline required by a company to pay a dividend back to shareholders every single quarter, and grow that payout to shareholders every year, is a GREAT indicator for earnings stability and share price appreciation. Taking this logic one step further, I believe that a stable growing dividend is an indication of great corporate management, discipline, and deference to shareholders. Taking this logic one additional step, I believe any enterprise that pays a consistent, growing dividend over long periods is very likely a GREAT company.
So a growing dividend has become a consistent theme of my investing over the past 1.5 years, the results have been excellent so far. Looking at dividend growth in my IRA since 2010, you can see the effect of transitioning to dividend payers/growers:
Back in 2010, I was invested mostly in index funds and ETFs. By late 2012, I had transitioned the portfolio to approximately 32 dividend growth stocks. Dividend payments, which are reinvested, have been growing at a compound annual growth rate of over 21%. That's a pretty good clip, but perhaps difficult to maintain.
Here is the Chump portfolio today, sorted by position size:
What's interesting is the dividend growth rate. The weighted average one year increase in dividends for this portfolio was a remarkable 31.32%! Based on dividend income received, I've set myself up for a 30+% raise in income, and I control the raise %. How cool is that? And this raise will come IRRESPECTIVE of how the share prices move.
Right, that's all great, but I can't live on the income this portfolio threw off in 2013, a measly
$12,704 can I? Of course not, but my point is, to some degree, I can control how that income grows by selecting stocks that keep growing the dividend, and grow it fast. If I assume retirement in 15 years, I can project some different income scenarios, again, independent of how the market performs. Here are those dividend income projections:
Looking at the chart above, every scenario starts with the $12k in dividends from 2013. But going out 15 years to retirement, you can see that the RATE of DIVIDEND INCREASES is a major factor in determining my income at retirement. Can the portfolio sustain a 20% dividend growth rate? I'm not sure, but if I'm focused on this metric, I can sure try ;-) Looking back up at my holdings, and the one year dividend growth column, I count 9 of my 32 holdings that raised the dividend at least 20% last year, and another 7 of 32 that raised the dividend by more than 10%. Further, portfolio weight comes into play. Even if I can't maintain 20% CAGR over time, I'd be quite happy with 15%, which gets to me to an income of $90k per year at retirement, and I don't have to sell any shares to get it.
In summary, I'm a value investor, buying stocks when they are undervalued. But I only look at stock with a consistent, growing dividend track record. And even though some of my stocks pay small yields today, and my weighted average portfolio yield is only 2.85%, it's the growth in this income that's critical. I have 15 years, so I can accept a slightly lower than typical DG yield in exchange for rapid dividend growth.
That's all for now,
As always, I welcome your comments.