I’ve written many times about the benefits of dividend growth investing. When you look at a concept like compounding interest, there’s many different ways to achieve the same end goal. However, dividend growth investing gives you the best possible way.
For one, dividend payments provide compounding by increasing the number of shares held every year through reinvestment. So, a stock held for a long time will compound the interest received simply because there will be more shares from previous reinvestments.
As long as the company continues to pay the dividend, which most do, then the interest received from dividend payments will increase with an increased number of shares.
In addition to that, dividend growth stocks provide compounding interest through the growth of the dividend payments from year to year.
Not only do most dividend paying companies continue to pay their dividend every year, but many of the high performing dividend payers succeed in increasing their payouts every year, to a point where they reach consecutive years of dividend growth.
Dividend Growth Investing Success
10, 25, and even 50 years of consecutive dividend growth are markers of this achievement in a group candidly called dividend aristocrats. These businesses have been successful in achieving the ultimate goal of a corporation, which is to return money to shareholders.
They’ve also succeeded in doing so throughout many economic recessions, bear markets, and economic and global crises and panics. The dividend aristocrats epitomize the best vehicles for rapid compounding of wealth through a stock market investment.
It’s the dividend aristocrats like Coca Cola, Walmart, and Altria who’ve created the inspirational examples of what a small amount of money can become over a long period of time. I’ve written about this many times before, with simple examples showing how a small sum like $10,000 can compound into millions through the right dividend growth companies.
To be sure, not every stock will become a dividend growth investing success. Some of the weaker businesses face a stagnation, suspension, or outright removal of their dividend when hit with tough times.
That’s to be expected, which is why we must combine such an investing strategy with other prudent principles such as value investing and diversification. It’s completely fine to be wrong sometimes, and we don’t even have to be right most of the time. As the examples have shown, it could take just one superb investment to create decades of high-yield, consecutively growing dividend payments.
As dividend payments grow each year, the share price inevitably follows. This double upwards movement multiplies our returns and creates the exponential growth magic of compounding interest. It’s no doubt a much faster and efficient way to utilize compound interest.
The higher share price makes shares accumulated through reinvestment even more profitable, and will continue to do so as long as dividend payments increase. Hopefully you can see why I get so excited about this.
Now that we’ve prefaced the allure of dividend growth investing, I want to help you actually achieve it. [click to continue…]