Dividend Growth Investing

What the approach is

The organizing variable is the rate at which a dividend rises, not how large it is on the day of purchase. Price still matters, but mainly as the cost paid to acquire a claim on a payment stream that is expected to grow; the payment itself is what gets tracked over time.

The reasoning behind the approach is that a payment rising every year increases the income measured against the original outlay, and that a company able to keep raising it through a recession usually has recurring revenue and does not need heavy reinvestment to stay competitive. That is a description of what the screen tends to select, not a forecast about any individual company's future.

There is a structural trade-off built into this at the entity level. A REIT is required to distribute at least 90% of its taxable income, which leaves little retained for reinvestment, so dividend growth in that structure comes mostly from raising new capital externally rather than from ploughing back profit. Streak-based labels such as aristocrats, kings, and achievers are index shorthand for the same idea, defined by published membership rules rather than by any single formula.

Total return is still what determines the outcome of holding the shares. Dividend growth is one input into what the shares are worth; it is not a return that shows up separately from the share price.

The arithmetic

Yield on cost is the current annual dividend divided by the price originally paid, not the price today. On invented numbers: a $1.00 dividend bought at $25 is a 4% yield on cost, and if the dividend later reaches $2.00 the yield on cost becomes 8%, entirely independent of what the shares trade for by then. Dividend CAGR is the compound annual growth rate of the payment itself: ending dividend divided by starting dividend, raised to the power of one over the number of years, minus one. A dividend that rises from $1.00 to $2.00 over ten years compounds at roughly 7.2% a year.

The rule of 72 gives the same intuition without a calculator: a payment compounding near 7% a year doubles in about ten years, and one compounding near 10% doubles in about seven.

Growth has to be funded from somewhere. It is approximately earnings growth plus whatever a rising payout ratio contributes on top of that, and the payout-ratio contribution is finite because it stops the moment the ratio reaches 100%. The standard decomposition of long-run equity return — starting yield plus growth plus the change in valuation — makes the same point from another angle: over short periods, the valuation term tends to dominate the other two.

A streak simply counts consecutive annual increases and takes no notice of their size, so a one-cent raise preserves the record exactly as well as a large one does.

How the record is measured

Streaks can be counted on the total amount paid across a calendar or fiscal year or on the declared per-share rate at a point in time, and providers differ in which convention they use, so published streak counts for the same company can disagree at the margin. Corporate actions complicate the count further: spin-offs, mergers, and share consolidations all change the per-share payment for reasons that have nothing to do with the company's dividend policy.

Special or one-off dividends are normally excluded from streak calculations, since counting them would make the following year's ordinary dividend nearly impossible to beat on a like-for-like basis.

A company can preserve an intact streak while the size of its increases decelerates sharply; the streak count itself does not show this, but the three-year and five-year dividend CAGR do. Growth figures measured over three, five, and ten years describe different periods and can tell different stories — a five-year figure that spans 2020 carries the mark of that year's dividend cuts and freezes, while one starting after it does not.

Years of continuous payment and years of continuous increase are separate counts. A company can have a long, unbroken record of paying a dividend with no growth record attached to it at all.

Where it misleads

A screen built on a past streak is shaped by survivorship: the list contains only the companies that never cut, which makes the criterion look cleaner in hindsight than the actual experience of holding its members through the period would have been. The record can also distort behavior at the company itself — a board with a well-known streak has a reason to fund one more increase with debt rather than let the label break.

Concentration is built into the criterion, not an accident of any particular list. Streak screens tilt toward consumer staples, industrials, and healthcare, and away from anything cyclical, capital-intensive, or too recently listed to have a long history.

Yield on cost rises by construction as the dividend rises, and can never fall while the payment holds; it describes a specific position bought at a specific price, and is not comparable with any yield on offer to a buyer today. Dividend growth also does not guarantee total return — if the starting valuation was high, the payment can keep compounding while the share price does not.

In a taxable account, dividends are taxed as received whether or not they are reinvested, while retained earnings and share buybacks are not taxed to the shareholder at the time they occur. Any comparison of an income-first approach against a total-return approach has to account for that tax drag.

Where you will meet it on this site

Growth streak, three-year and five-year dividend CAGR, and years-paying are computed from payment history for every security with sufficient data, and are shown next to the current yield and payout ratio rather than in isolation. Screens on this site can be sorted by growth rather than by yield, and doing so surfaces a materially different set of securities than a yield-based sort would.

The aristocrats and kings reference page covers the specific index rules that convert a raw streak count into one of those labels.

The calculators project a future income stream from a starting yield and an assumed growth rate, and the output is labeled an illustration rather than a projection, because the growth assumption belongs to the user, not to any historical guarantee. The course covers the distinction between income taken as cash and total return, which is the underlying distinction this entire approach is built on.