Friday, October 22, 2010

The Dividend Growth Investing Strategy

After reading several different investment strategies, I've decided to begin implementing the dividend growth strategy. This is an investment strategy where an investor purchases stocks of well-established companies that continually increase their dividend per share over a long period of time. Ideally, the investor need never sell their stocks unless a company makes dividend cuts. In order to qualify as a good dividend growth stock, a company must have a fairly long history of increasing their dividends (usually ten years in a row, or more). A good place to find a list of such companies is the S&P/TSX Canadian Dividend Aristocrats list.

This strategy is particularly effective because an investor receives dividends every quarter, and a higher dividend over time. The dividends can be used in a Dividend Reinvestment Plan to purchase additional shares, or accumulated to buy another dividend growth stock. Sometimes a stock dividend is paid out instead of cash, which is effectively a stock split. Once a good dividend growth portfolio is established, an investor simply makes money via passive income. The only downside to this strategy is that it takes time and patience.

Dividend growth stocks should fit a strict list of criteria before being purchased. A company should not pay out too much money in dividends, or it won't be able to sustain itself and use some of its cash to invest in the company's future. The company should be able to grow its earnings, and increase dividends as the earnings grow. An investor should try to hold some dividend growth stocks from each of the different sectors (eg. financial, utilities, materials, etc.)

Watch for further posts analyzing specific dividend growth stocks.

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