Advantages of Dividend Growth Investing
1. Dividend Growth Compounding
The benefits of exponential growth are multiplied by growing dividends. This is because both the number of shares (from reinvestment) and the dividends per share are growing. The exponential power of dividend growth compounding can provide competitive returns regardless of whether the price of the stock increases in value or not.
2. Take Advantage of Bear Markets
Investors savvy enough to reinvest dividends during bear markets purchase more shares with the dividend while the prices are low rather than when the prices are high. Later, when prices recover, the return is actually enhanced by the temporary fall in the stock price. Reinvesting dividends and accumulating more shares during bear markets greatly boost dividend growth investing returns.
3. Capital Preservation
Quality dividend paying companies are more mature and stable than the average company. These stocks usually hold up better in down markets than more speculative stocks. This is especially true when a value approach with a margin of safety is used when selecting stocks.
4. Create an Income Stream
Dividends provide a regular income stream. Most stocks pay a quarterly dividend, but a well constructed portfolio of dividend stocks can provide a consistent monthly income stream. You want to buy companies that have the ability to consistently increase the dividend. It’s a mistake to focus only on yield.
5. Inflation Hedge
The big disadvantage of fixed income investments is the income stream doesn’t grow. Even a 3% inflation rate will destroy 50% of the buying power of your principal in just 24 years. Dividend growth stocks provide the ability to receive income that increases and maintain the purchasing power of your principal and income.