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The ‘Growth’ in Dividend Growth Investing

Posted on November 15, 2021November 14, 2021 by Jeremy Shirey

Let’s talk about the GROWTH part of the term Dividend Growth Investing.

This doesn’t mean capital appreciation, although that is important as well.

The dividend growth rate is the annualized percentage rate of growth that a particular stock’s dividend undergoes over a period of time.

There are two magical aspects of dividend growth investing – the growth of the dividend and compounding.

Dividend growth helps your income grow over time without you having to put more money in. The investment you make today will pay you more 5 years from now due to the dividend growth.

Some companies increase 2-3% a year (think T, VZ) and others grow really quick (think ABBV and AVGO). The average is usually around 7% a year.

This is a 7% increase in income just for being invested in world-class companies. Do you get 7% raises every year at work? Probably not. Pretty magical if you ask me.

If you don’t get dividend growth, your income will not keep up with inflation. Here in the US the inflation rate has been around 3% a year. That means that your purchasing power gets cut in half every 24 years!

That is right. A dollar today will be worth $.50 in 24 years. Most of us will be using our money in 24 years, so just imagine needing two times the income to maintain your purchasing power of today.

That is where dividend growth investing can help. If you can get raises of 7% a year you are staying well ahead of inflation.

So how do you know what your holdings are increasing by? Most financial websites can give you the past 3, 5, and 10 year compound annual growth rate (CAGR) of your investments. If you multiply that rate by the weight of each company in your account and sum it up it will give you your weighted average CAGR for your portfolio as a whole.

My accounts have a 5-year CAGR of 8.25% and 9.5%, respectively, and have a current yield around 4.25%.

The current yield plus dividend growth, reinvested over time to allow for compounding to happen is what is going to make you be able to live off your dividends.

Let me know what you think and what your goal for dividend growth is!

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