Dividend growth stock investing is a different strategy than the buy-low, sell-high ideas I teach in this site.  However, it is a good way to go.  Remember lesson #6 where I shared additional strategies?  That’s because buy-low, sell-high is not the only way to go, just one of the best.  Arguably the best.  You may not make as much money with dividend growth stock investing, or as much as quickly, but it may be more of your style.  In any case, it is always beneficial to understand other strategies.

What is Dividend Growth Stock Investing?

Dividend growth stocks are stocks that have a history of paying increasing dividends year after year.  Stocks I look for have been paying dividends for a large number of years.  Typically these companies tend to increase these dividends every year.  For example Coca Cola is a strong dividend growth stock that has been increasing their dividend payment every year for the past 50 years.  This means every year you own this stock, they will pay you a slightly higher amount of income thanthey paid you the year before.  Typically we will look for dividend increases that keep pace or grow faster than inflation.

Why Should I Try Dividend Growth Stock Investing?

Ask people why they invest and the answer generally boils down to making money.  Some may be speculating, trying to hit the jackpot.  Others may be trying to accumulate enough assets to help them make it through retirement.  Dividend Growth Stock investing involves trying to put together a portfolio of stocks with an increasing dividend income year after year.  We want to build a portfolio large enough so that the income paid out in dividends can support our everyday expenses in life.  If you can pay all our bills out of the dividend income, there will never be a reason to sell the underlying asset (shares of stock).  If done right, you will never have to worry about running out of money and will have a nice nest egg to pass on to heirs or benefactors upon your death.

Is Dividend Growth Stock Investing Better Than Other Investments?

Investing in dividend growth stocks provides many benefits over other assets you may want to invest in.  A big benefit of dividend growth stocks is preservation of capital.  Dividend growth stocks tend to be more stable, less volatile than other types of stocks.  While you can certainly lose money investing in dividend stocks, history has shown the types of companies typically paying dividends are usually more stable.  If you are following the plan correctly, you will hopefully only rarely be in a position to sell out of a company at a loss.  The majority of your well selected stocks will continue to increase their earnings, dividends paid out and overall stock price.

Dividend growth stocks provide major benefits through compounding.  While you are in the accumulation phase of your investing life, you will be reinvesting the dividends paid to you by the companies you own shares in.  These reinvested dividends will buy more shares that will then pay out dividends in the future.  This has the powerful compounding effect just like interest on a savings account only typically at a higher rate.

Well selected stocks will increase their dividends, and thus your income, at a rate faster than inflation.  You will put together a portfolio of stocks that pay out an income.  The goal is to be able to eventually use this income to pay your bills or at least part of your expenses sometime in the future.  Stocks that are chosen based on dividend growth criteria will pay out an increasing income each year.  Your portfolios income will give you a raise each year.  Much like the raise you received while working in a job.  Only lots of times your dividend raises will be higher and will keep your income level above inflation.

Not a Get Rich Quick Plan

Dividend growth stock investing is not a get rich quick investing method.  You are buying strong, stable, mature companies that have a history of increasing their earnings and dividends year after year.  These companies usually aren’t going to offer you triple digit gains in a single year.  You won’t find yourself rich overnight.  However, these companies will over time provide a solid steady return that will grow your wealth.  Depending on the amount you are able to invest each month or year, it can take you quite a bit of time to build up a sizable portfolio.  But this is a safe way to invest your hard earned cash towards your future wealth.

How Do I Get Into Dividend Stock Investing?

If you are interested in growing your wealth through dividend growth stock investing then you will have to do some research.  First, you will need to figure out your investing goals.  Next, research stocks to decide where the best place for you to invest is.  I find Yahoo Finance to be very helpful.  You can invest in a retirement program such as an IRA or you may want to invest in a taxable account through a brokerage.  All of this depends on your own individual needs.  I like E-Trade.

Once you have the learning down you will begin accumulating shares of different dividend growth stocks over time and reinvesting the dividends.  Your dividend income will increase year after year.  Eventually you will reach financial independence or at least you will be a lot closer than you are today.

Goals of Investing

When you decide that you want to become an investor, one of the first things you must do is map out your goals.  Figuring out what goals you want to achieve with your investments will help you determine what type of investing you should do and what strategy you may want to use.

Your Goals are your Investing Guide Map

Your goal in investing is going to be your mission statement.  The goals you set will help be a guideline for your investment decisions that you make in the future.  When setting your goals, make sure not to be vague.  Most people that are investing are obviously out to make money.  The question is why are you trying to make money through investing?  Maybe you want to invest in order to gain a higher return on your money so that you may be able to afford something in the future.  Possibly you are investing so that you can build up a passive income from rents, interest and dividends to spend now or in the future.

Whatever you decide, be sure to write out a clear goal statement and focus on it frequently as you advance through your investing career.  Modify your goal if and when things change.  Remember that it is OK if what was once your goal has now changed and you find yourself trying to achieve something different.  Just make sure to formulate your investing plan with your goals in mind.

Dividend Growth Stock Investing Goals

There are a few different goals you may be interested in pursuing where a dividend growth stock investing strategy is a suitable approach.

Building a passive income from dividends for current needs

Don’t spend your whole paycheck.  Instead, you may be interested in investing some money each month in dividend paying stocks.  This will allow you to build up an investment portfolio over time and provide some supplemental income if you decide to take the dividends in cash to spend as the companies pay out.

Building a passive income from dividends for future needs

You may decide that you don’t need more of a current income to meet your current needs and wants.  However, you don’t plan on working forever and someday that paycheck will quit coming in if you quit working.  Building a portfolio of dividend growth stocks is a good way to create an income for the future.  You can grow your portfolio quicker by reinvesting your current dividends and eventually the annual dividend income may be enough to cover your living expenses.  At this time you can afford to not have to work for a paycheck and just live off of your dividend income.  This is a good strategy for retirement.

Preserve investment capital

When you are looking for a safe investment to keep your money safe most people will thing of bonds.  While bonds will help keep your principal safe, they don’t offer much in the way of investment returns.  Another option if you are willing to take on a little more risk is dividend paying stocks.  Stocks are definitely a riskier asset class than bonds.  However, dividend paying stocks have typically been less volatile compared to other stocks.  Dividend paying stocks offer a decent income component and if you select your investments wisely will give you better preservation of your capital than non dividend paying stocks.  Compared to bonds, dividend paying stocks may be a little more risky in that you can lose some or all of your investment.  However they also typically offer greater returns than you would receive by investing in bonds.

Good returns

There have been studies that have shown that dividend paying stocks tend to outperform non dividend paying stocks over time.  Also, companies that annually increase their dividend payments tend to outperform companies that do not increase their dividend payments.  So over the long run, we can hope that we will be getting the best return in the market from our dividend paying stocks of solid well known companies.  You will probably be less likely to lose your money and earn a decent return from a Coca Cola type company compared to one you have never heard of and don’t understand.  Dividend growth investors pick solid stable companies that have a history of increasing earnings and paying out increasing dividends.  These companies perform well over the long run.

Examples of Dividend Growth Stocks

In order to qualify to be a dividend growth stock, the company must have a history of consistently increasing their dividend payment year after year.  Some companies may have a longer history than others.  It is up to you to decide what your minimum number of years of dividend increases will be.  Some investors may only consider companies that have raised dividends for at least the past 20 years or more while other investors may require only 10 years worth of increases or possibly even less.  You should look for a company to have a history of at least 5 years worth of dividend increases.

Now, just because a company has a history of annual dividend increases, does not guarantee it is a good investment.  You must do your own research looking at metrics such as earnings growth and current valuation to determine if it will be a good investment for you.

Popular Dividend Growth Stocks

Coca-Cola (KO)

Coca-Cola is the world’s largest soft drink company.  They sell more than 500 beverage brands across the world.  Coca-Cola has increased their dividend every year for the past 50 years.

Johnson & Johnson (JNJ)

Johnson & Johnson is a large health care firm with products in the pharmaceutical and medical device industries.  Their consumer segment markets and sells brands such as Band-Aid bandages and Tylenol pain reliever.  Johnson & Johnson has increased their dividend every year for the past 50 years.

Wal-Mart (WMT)

Wal-Mart is the largest retailer in North America with expansion making way in international markets.  The company operates discount stores and supermarkets as well as wholesale clubs.  Wal-Mart has increased their dividend every year for the past 38 years.

AT&T (T)

AT&T is a telephone and broadband services company.  They have increased their dividend every year for the past 28 years.

Aflac (AFL)

Aflac is an insurance company providing supplemental health and life insurance.  The majority of their earnings arise from sales in Japan.  Aflac has increased their dividend every year for the past 29 years.

McDonald’s (MCD)

McDonald’s is the largest fast-food restaurant company in the world.  They operate over 33,000 restaurants around the world selling hamburgers and Happy Meals.  McDonald’s has increased their dividend every year for the past 35 years.

Where to Find Dividend Growth Stocks

I use the following resources to find good options of companies I may want to do some more research on.  I have created a dividend growth stock investing watch list from these resources of companies that I have heard of and understand.  Then I do my own research on the fundamentals and valuations of the companies.  That way I can see which would be the best investment when I am ready to make a purchase.  These resources are a good reference to find companies that have annual increases in their dividends.  However, just because a stock is on one of these lists does not automatically make it a good investment.  You must then do your own stock research analysis to decide for yourself whether this company is good for you or not.

Sites to Find Quality Growth Stock Investments

The DRiP Investing Resource Center

This is a site created and maintained by dividend growth advocate David Fish.  Here you will find a U.S. Dividends Champions spreadsheet with lots of data on dividend growth stocks.  Mr. Fish maintains a Champions list where you will find companies that have raised their dividends for 25+ straight years.  There is also a Contenders list for companies who have raised their dividends from 10 to 24 straight years and a Challengers list for companies who have raised dividends from 5 to 9 straight years.  When creating my watch list I looked for companies on each list.  The spreadsheet includes lots of great data that you may find interesting but I recommend once you have chosen some companies of interest you do your own research.


This is a site dedicated to dividends.  Here you can find lots of updates about dividend increases, cuts and announcements.  If there is news on dividend stocks, you’ll find it here.  They also have lots of useful tools and information to help you on your journey to wealth.  It’s also free to sign up.

You can use these 2 resources to help build a watchlist of dividend growth stocks you may want to purchase.  I frequently look these lists over as well as oftentimes just looking into random companies that may interest me.  If you hear of a company feel free to check it’s dividend historical data and see for yourself if it would qualify to be a dividend growth stock with annual increasing dividends.

Creating a Dividend Growth Stock Watch List

As a dividend growth stock investor, one of your most useful tools will be your stock watch list.  You want to create a list of stocks that can be considered for future investment.  When you have some capital that is ready to be invested, your first stop will be the watch list you have put together.  These will be the companies you are most familiar with.  These are the companies you are most interested in owning under the right circumstances.  You’ll analyze and value the stocks on this list to determine which company or companies would be the best investment at the current time.

How Many Stocks Should be in My Watch List?

The size of your stock watch list will be determined by you depending on how many stocks you have time for or want to keep track of.  If you have too large of a list, it will be very difficult keeping track of each company and their current valuations.  If your list is too small then you are limiting yourself and possibly missing some great investment opportunities.  As a general rule, I would have at least 5, but no more than 20.

Putting Together the Watch List

For our dividend growth stock watch list we are looking for stocks that frequently increase dividends.  I often go through these lists to find companies who frequently raise dividends that I am familiar with.  My watch list is made up of companies that I have heard of and whose business I can understand.  It is important to create your list with companies that you understand so that you can analyze their operations to help determine if you want to own them or not.  If you can’t understand how a company makes money, then you will not be able to figure out if management of that company is doing a good job.

When deciding on companies to put in your watch list, of course it is important to make sure you understand the business.  But you also want to make sure management is doing a good job running that business.  Study the historical EPS (earnings per share) of each company you are considering.  In order for a company to qualify for your watch list, it should have a historical trend of consistent and increasing EPS.  You don’t want a company with erratic earnings.  One or two down years in earnings shouldn’t disqualify a company.  But the more consistent a company’s earnings are, the easier it is to value and project expectations going forward.  Do not bother putting a company on your list if EPS are erratic frequently going up or down with no apparent trend from year to year.

How to Analyze a Dividend Growth Stock

Before throwing your money at dividend growth stocks, it is important to do your research.  You need to analyze the stock to determine the company’s strength, future potential and current valuation.  You need to make sure the company that you may invest in is a well run money-making machine that can hopefully pay you increasing dividends for years to come.

Gathering Data

When analyzing stocks it is helpful to have resources of financial data to help quickly identify good stocks.  One helpful resource I already mentioned is Yahoo Finance.  Another good on is Value Line.  Usually you can find updated Value Line analysis at your local library.  This is where I usually will copy the pages I need to use for my own analysis.  I also gather some information using a company’s financial reports.  A simple Google search can find them for any company.

Below you will find the different metrics I use to determine a company’s strength and future profitability.  I will usually work up a full report and compare the reports of different companies to determine which ones I believe will be the best to invest in.

Dividend Growth

When looking for stocks to invest in one of the first things I look for is annual dividend growth.  I like to invest in companies that have a history of paying out dividends and increasing those dividends year after year.  For stocks that you want to consider investing in, examine the recent history of dividend increases.  Calculate the growth rate of the dividend over the past few years.  Typically I will calculate the compound annual growth rate of the past 5 or 10 years using this online calculator.  I also calculate the growth rate year over year of the last couple dividend increases.  This gives me an idea if the company is slowing down or increasing their dividend growth rate in more recent years.  I like to look for dividend growth above 8% or so.

Earnings Per Share (EPS)

The next metric I want to analyze is the company’s earnings per share history.  Look for companies that have consistent and increasing earnings per share.  We do not want to invest in companies who have erratic earnings that are hard to predict.  One or two down years may not rule a company out but generally over the past 10 years I like to see an upward trend in the EPS.

It is important to calculate the 5 or 10 year compound annual growth rate for EPS using the same online calculator.  Also calculate the growth rate year over year of the last couple years.  Compare the EPS growth rate to the dividend growth rates you previously calculated.  If dividends are growing faster than EPS this is not sustainable for the company.  Since dividends are paid out of the companies earnings, we want to see earnings growing at the same pace or faster than dividends.

Net Profits

Another key figure I look at is net profits of the company, or how much money the company is making.  Analyze the past 5 to 10 years worth of net profits to determine if management is taking the company in the right direction.  Like EPS we want to see a consistent upward trend in the net profit numbers.  When a company pays a dividend it is paying out a portion of their profits.  We want to make sure profits are growing so that the company is able to continue growing dividends.  It is important to compare the growth rate of net profits to the growth rate of the EPS and dividends.  If profits are growing slower than dividend growth then this leads me to believe that the dividend growth rate will have to slow in the future.

Sales Revenues

Next I want to look at the growth of revenues.  A company may be increasing their net profits because of cutting expenses.  However you can’t indefinitely increase profits without sales revenue growth.  Therefore I want to see a company consistently increasing their revenues.  I calculate the 5 and 10 year growth rates again to compare to the growth rates of profits, EPS and dividend growth.  Most of these growth rates should be fairly consistent with each other.  A company that is growing revenues should also be growing their net profits unless expenses are growing at a faster rate.  This is something we want to make sure is not happening.

Outstanding Shares

It is important to see that the companies outstanding shares count is either staying consistent or decreasing.  A decreasing share count means the company is buying back shares.  When a company buys back shares, the remaining shares then each represent a larger portion of the company.  With less shares outstanding, my shares are give me a larger portion of the earnings.  I want to make sure that shares outstanding are not increasing.  This could be happening because the company is awarding bonuses to management or raising new money through secondary share offerings.  Either way, as more shares enter the market they are diluting my current ownership.  I don’t want my ownership to be diluted.

Return on Equity

Return on equity measures a corporation’s profitability.  The calculation tells you how much profit a company makes with the money invested by shareholders.  It takes into account the retained earnings from prior years so investors know how effectively management is reinvesting their capital.  Typically I look for return on equity of at least 12% and I either want this number to stay consistent or increase.  It is valuable to compare companies within the same industry to determine how a specific company is doing.  You cannot compare companies within different industries because different industries will generally operate at different returns on equity.  It is important to note if there is a downtrend in return on equity because we will generally want to stay away.

Current Ratio

The current ratio is a test of a company’s short term financial strength.  The ratio calculates how many dollars in short term assets would be available to cover short term liabilities coming due within one year.   I look for a company’s current ratio to be above 1 so that I feel confident the company won’t have short term liquidity troubles.

Net Profits to Long Term Debt

I want to make sure that the company does not have too much debt that will cause future problems.  Compare the net profits of a company and thier long term debt amount.  Long term debt should be less than five times net profits.  This will mean that if the company used all their net profits over the next five years they would be able to eliminate all long term debt.  While debt is not necessarily a bad thing, I want to make sure a company has not taken on so much debt that it will cause problems in the future.  If a company is struggling to service it’s debt one of the first things they will be forced to do is cut thier dividend in order to use that money for debt repayment instead.

Payout Ratio

The payout ratio is a measure of the profits of a company that are being paid out as dividends.  If a company has $1 in EPS and a dividend rate of $0.50, it’s payout ratio would be 50%.  A lower payout ratio generally means the dividend rate is more safe from future cuts than a high payout ratio.  The payout ratio fluctuates between industries.  Certain industries like tobacco companies will have high payout ratios.  This is because they don’t have many opportunities to grow thier business so they pay out most of their profits to thier shareholders.  Other industries like technology may still have opportunities for growth so they will retain some of those profits in order to invest in those opportunities.  Compare the payout ratios of companies within the same industries to determine if they are too high or at an acceptable level.

Dividend Yield

Dividend growth stock investing means determining your criteria for a required dividend yield.  Generally I prefer a dividend yield of at least 2.5%.  I may consider a slightly lower yield if thier is high dividend growth rate.  Typically I try to diversify by investing in some companies with a higher dividend yield (but most likely lower growth rate) and some other companies with a lower yield (but more likely higher growth rate).  This gives me a good overall balance in my portfolio of dividend yield and dividend growth rate.


Investing in dividend-paying stocks can be very lucrative.  But again, it won’t happen overnight.  You will never win the figurative stock market lottery, but you will almost surely end up wealthy someday.  Remember though, if you decide to invest this way, do your homework!  It is essential to make the best choices to ensure you aren’t just buying a little no-name stock that currently pays a high dividend, but ends up going bankrupt!