Dividend Growth InvestingDividend growth investing, as the title says, is about investing in stocks whose dividends keep growing. This is the other way of investing for income. High-yield investors go for double-digit yields right off the bat. By contrast dividend-growth investors don't mind lower yields in the beginning because they know that the company is going to pay them a dividend that is going to grow every year. As we saw in the article on high-yield investing, tax laws require these companies (BDCs, REITs, MLPs etc.) to pay out most of their earnings (typically at least 90%) as dividends. As a results, these companies cannot retain earnings and plow them back into expanding their businesses. They have to borrow money for growth. Dividend Growth in ActionLet us look at Chevron (CVX), the oil and natural gas giant, as an example. It is paying out a yield of 3.7% (as of 10/11/09). That is not a whole lot of income. But now take a look at the dividend history. This dividend has been growing steadily and at a serious clip too! So if you bought 100 shares of Chevron 5 years ago in October 2004, you got paid $170 in the first year, $194 in the second, $220 in the third, $246 in the fourth year and $266 in the last 4 quarters. This is a classic case of investing for dividend growth, and illustrates why many investors are attracted to this philosophy. Payout RatioDividend growth investors have to keep an eye on an important number called the "payout ratio", which is calculated as follows:Payout ratio = annual dividend / annual earnings per share It is usually expressed as a percentage. Coming back to Chevron, the company has earned $8.13 in the last twelve months and is paying out a dividend of $2.72. Thus the payout ratio is just over 33%. What happens to the remainder of the earnings? They get reinvested in growing the company, which keeps the earnings growing - growing the dividends in turn. Dividend AristocratsSo how would you go about finding these kinds of companies that keep on paying dividends and growing? You could do worse than going with the Dividend Aristocrats.Standards and Poor, the company that publishes the benchmark S&P 500 index for US stocks, publishes this highly useful list of dividend paying companies. The main criterion they use is whether the company has consistently raised its dividend every year for the last 25 years! They call these companies Dividend Aristocrats. Here is the list for 2009, and it can be a very good starting point for dividend-growth investing. Resource: Dividend Growth Investing BlogDividend Growth Investor is another useful resource for information regarding this style of investing. This article in particular - provocatively titled Are High-Dividend Stocks Worth it? - lays out the rationale behind dividend-growth investing.I would recommend subscribing to the weekly newsletter which has a lot of up-to-date information about dividend growth. DISCLAIMER: Needless to say, do your own research and due-diligence before employing the dividend-growth investing philosophy - or any other endeavor for that matter!
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