What Are Dividend Growth Stocks? - InvestingChannel

What Are Dividend Growth Stocks?

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What Are Dividend Growth Stocks?

At The Juice, we aim to deliver straightforward ways to help you be better with money. We do this by presenting a clear picture on the latest economic news around big issues, such as consumer debt and housing. On investing, we tell you everything we know about sound approaches to building long-term wealth and making some money today

Sometimes we even blend personal finance with investing insight

Today, we focus squarely on investing. And one of our favorite topics, dividend growth investing. We most recently covered this investing approach in relation to ETFs

Let’s go deeper in the weeds and explain exactly what the dividend growth in dividend growth investing means and how it functions in your brokerage account. 

While important when evaluating dividend stocks, growth here doesn’t refer to sales or profit growth. Instead, we’re dealing with growth in the dividend. 

Does a company increase its dividend annually? 

Four of the five stocks in today’s Trackstar top five of the dividend-paying stocks investors are searching for most have consecutive years track records of annual dividend increases. 

  • Apple (AAPL): 12 years
  • Microsoft (MSFT): 20 years 
  • AT&T (T): 0 years
  • Visa (V): 14 years 
  • Chevron (CVX): 37 years 

We’ll use a couple of these names as examples to show exactly how dividend growth investing works and expose a potential pitfall of falling asleep at the wheel of a struggling dividend payer.  

Consider Apple. Let’s say you bought 100 shares of AAPL on February 1, 2023. With the stock trading at $145.43, your 100 shares would have been worth $14,543. At the time Apple was paying a $0.23 quarterly, or $0.92 annual dividend. You could do the math and say, cool, I can expect to receive $92 in dividend income over the course of a year from Apple. And you’d be close, but not quite right. 

Because you left out two key factors of dividend growth investing:

  • The dividend growth, and
  • Dividend reinvestment

When you receive a dividend, you can elect to have your brokerage reinvest it into new shares of the stock. If you did this with Apple, you would have reinvested the February 16, 2023 dividend of $0.23 ($23 in cash), thereby increasing your position size from 100 shares to roughly 100.15 shares (assuming you reinvested that $23 dividend into .15 shares of AAPL at $153.71). 

Apple’s next dividend payment – which was payable on May 18, 2023 – was for $0.24. It went up. Because Apple went ahead with a dividend increase of $0.01 quarterly, or $0.04 annually. 

So now, instead of getting paid a dividend on 100 shares, you’re getting it on 100.15 shares. Instead of a $24 payment on 100 shares that quarter, you’re getting an ever so slightly higher $24.04 on 100.15 shares. You could have reinvested that $24.04 into more Apple stock on May 18, 2023 and added approximately 0.138 shares to your position (with AAPL trading at $175.05 that day), bringing it to about 100.29 shares. 

With AAPL trading around $187.87, those 100.29 shares would be worth roughly $18,841, as of the end of August, 2023. 

We use AAPL because it’s a popular stock and, almost without doubt, will continue to increase its dividend for the foreseeable future. Rinse and repeat this quarter after quarter and before you know it you have meaningfully increased your Apple holding simply by reinvesting dividends. 

So, in this context, dividend growth, if coupled with dividend reinvestment, can increase your cash dividend payout each quarter and position size, leading to – all else equal – increased income generation. 

In reference to Apple continuing to increase its dividend we said almost without doubt for a reason. 

Many AT&T investors thought that company would never cut or stop paying a dividend. They hung onto the stock, even as it was declining, amid a dividend freeze in 2021 (during the Time Warner spinoff) and a 50% dividend cut in 2022. While T still pays a dividend, it might not increase it again until 2024. Meantime, T stock is down roughly 39% over the last five years. 

You’ll notice that Disney (DIS) isn’t on today’s Trackstar list. That’s because, after increasing its dividend for 34 straight years, Disney eliminated the payout after the pandemic started. It has yet to reinstate its dividend, though the company has stated it plans to do so soon. 

The Bottom Line: While we all have favorites, no company, no stock, no investing strategy is immune to things going not quite as planned or anticipated. Even the best blue chip stocks of blue chip stocks – like Disney – can run into trouble that negatively impacts its dividend. We don’t expect this to happen to Apple, but, if we’re being honest, we might have said the same about Disney (though not AT&T!) prior to the pandemic. 

Yet again, today’s exercise underscores the importance of several key investing tenets: diversification and being it in for the long haul at the same time as not remaining too loyal to any one company, stock or investing style.

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