Becoming a Successful Dividend Growth Investor - The Dreaming Dad (2024)

Dividend Growth History

Let’s start with a bit of History.
The father of Dividend Growth Investment is, without any doubt, Warren Buffet.
Using a tweaked version of, Benjamin Graham value investing strategy, he achieve a phenomenal success and became a multi-billionaire worth more than 60 Billions USD.
He tweaked his mentor’s strategy by applying a value centered approach to what he called wonderful businesses into what would become dividend growth investment.

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.–Warren Buffet

But what is a wonderful company you might ask.
Let’s look at one of Buffet’s longest holding Coca-Cola (KO). Everyone can potentially create a brown sugary bubbly liquid that taste great. But, not all company can replicate the brand success. As such, Coca-Cola hold a distinctive brand equity advantage that it’s very hard to beat. As such, a great business has a strong and long lasting advantage over it’s competitor that will last for a long time (forever preferably).

Minimize your fees

Have you ever looked at the overall fees that you incur when trading any securities?
Every single time that you buy or sell any security you will incur some form of cost called frictional costs:

• Slippage
• Brokerage Fee
• Bid-Ask Spread
• Taxes
• Penalty Fees (for quickly trading mutual funds)

Based on those fees, the more you trade, the lower your return.
That is why individual investors, such as you and I, tend to underperform the market. However, if you buy and hold that security for a very long time (forever) you will not have to incur those frictional costs often.

When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever – Warren Buffet

This citation from Warren Buffet says it all. And he has been very stubborn at that, selling it’s core holding very rarely.

Another very nice and powerful, but hidden, benefits of holding forever is that the tax money you would pay due to capital gain, if you would have sold, is left to compound and grow in this security that you have invested in.
Dividend Growth investing is perfectly suited for this strategy of buying and holding great dividend paying company that will increase year over year.
This should be a great incentive to hold your share for as long as possible, because technically, the longer you hold, the higher your dividend grows and the higher your income becomes. This is specially true if you keep reinvesting your dividend growth in the same companies.

Why Choose the Dividend Growth Investment Path

Warren Buffet.

He has to be the most successful Dividend Growth investor of all time.
More then 90% of it’s portfolio is invested in dividend paying shares. And if you look closely, you will notice that most of these dividend paying stocks have long dividend growth history.
Granted that this is not a factual proof, but still a proof of the dividend growth investment strategy efficiency.

Factual evidence

A compound total annual return study from Ned Davis Research Inc for the stock market from 1972 to 2018 shows the following results:

Source: 2018 Ned Davis Research Inc. Past performances does not guarantee future results. Indexes are un-managed and one cannot invest directly in an index. All stocks were categorized by the following methodology for total return each 12-month period since Jan. 21, 1972 period ended Jan. 31 2018. Dividend Cutters and Eliminators represents stocks in the S&P 500 that have lowered or eliminated their dividend; Non-Dividend-Paying-Stocks, represents non-dividend-paying stocks of the S&P 500; Dividend Payers With No Change represents all dividend-paying stocks in the S&P 500 that have maintained their existing dividend rate; All Dividend-Paying Stocks represent all dividend-paying stocks in the S&P 500; Dividend Grower and Initiators represents all dividend-paying stocks of the S&P 500 that raised their existing dividend or initiated dividend. Performance doesn’t not represent any unit trust or strategy.

Looking at those results, it can be seen that the dividend stocks performed very well.
In my opinion, these businesses did so well because businesses must generate actual income and be in good financial health to be able to comfortably distribute part of their profit to shareholder every year.
Now, a company that is in the Dividend Grower has to be increasing dividend year after year, a testament to the business model and financial health of the company. This is why, they can reward their shareholder with rising income.

Dividend Aristocrat

If you’ve been doing your research on investing strategies, you might have come upon them: the Dividend Aristocrats.
But who are they? This is a select group of great businesses that have increased their dividend payments for the last 25 (and more) years. As such, this is a group of stable, profitable and well managed business that are very well suited to the dividend growth investment strategy and include the like of:

For the United-State

• Coca Cola (KO)
• Clorox (CLX)
• PepsiCo (PEP)
• Wal-Mart (WMT)
• Procter & Gamble (PG)
• Johnson & Johnson (JNJ)

for Canada

• BCE (BCE)
• Telus (T)
• Canadien Tire Corporation (CTC.A)
• Enbridge (ENB)
• Suncore (SU)

It is to be noted that the on both side of the fence, the Dividend Aristocrat Index has outperform the S&P and TSX.
Also, these outperforming return were all achieved with a lower stock volatility, which means more stability to your portfolio. You must know that there are very few investment method out there that are able to outperform the market year after year for a significant period of time.

Conclusion

The historical evidence is there to convince you to change. A Dividend Growth strategy is a safe, reliable and low cost solution.