Dividend growth investing is an investment style focused on growing an investor's dividend stream through time. The style shares similarities to both value investing and growth investing, but is unique. Keep reading to see why switching to dividend growth investing could be the best new year's resolution you'll ever make for your bank account.
Philosophy of Dividend Growth Investing
The value of a business comes from the expected future cash flows shareholders can expect to receive. Common stocks generate cash flows to shareholders through dividend payments. As a result, the value of a stock comes from the expected dividend cash flows an investor expects to receive.
Dividend growth investors acknowledge that dividends are the most critical aspect of stock ownership. A dividend growth investor does not focus only on high yielding stocks. Rather, one should look at high quality businesses that will raise their dividends year after year. These businesses will maximize an investor's investment income stream over long time frames.
The end goal for most dividend growth investors is living off the dividend income stream created by their investment portfolio. I believe one only reaches true financial freedom when they can comfortably sustain their lifestyle with just the income from their portfolio. An investor who can live off their dividend income alone will never have to sell shares of their portfolio to sustain lifestyle. Instead, their dividend income stream and portfolio will (hopefully) grow year after year.
Dividend growth stocks are like fruit trees. Your investment may start out as a small sapling, but it will eventually grow into a large tree. You can either eat the fruit from the tree (spend the dividends) or replant the fruit and grow new trees (reinvest dividends into other dividend growth stocks).
Similarities to Value Investing
Dividend growth investing has several similarities to value investing. A value investor attempts to identify the intrinsic value of a stock and the purchase it for less than its intrinsic value. When the stock reaches its pre-calculated intrinsic value, the value investor sells the stock. Common value investing metrics include the P/E ratio, the P/B ratio, and dividend yield.
