Barometer Capital

Dividend Growth Investing: What You Need to Know

Dividend growth investing is a strategy that involves buying stocks in companies that consistently increase their dividend payments. By investing in these types of companies, you can earn a steady stream of income from your investments, which can help to offset some of the ups and downs of the stock market.

Why Choose Dividend Growth Investing?

  1. Regular Income: By investing in companies that pay dividends, you can receive regular income from your investments. This can be a great way to supplement your regular income, especially if you are retired or nearing retirement.
  2. Low Volatility: Dividend growth investing tends to be less volatile than other investment strategies, which can help you to sleep better at night. 
  3. Compound Interest: As you receive dividend payments, you can reinvest them back into the same stock, or a different dividend-paying stock. This helps you to earn compound interest, which can greatly increase your returns over time.
  4. Tax Advantage: Individual Canadian investors, when investing in Canadian, dividend-paying companies, are eligible for the dividend tax credit (this only applies to non-registered accounts). This makes income generated from dividends more tax-efficient.

How to Choose Dividend Stocks

  1. Look for Companies with a Strong Track Record: When choosing dividend stocks, look for companies that have a history of consistently increasing their dividend payments. Companies that have been paying dividends for a long time are often more reliable than those that just started paying dividends recently.
  2. Consider the Dividend Yield: The dividend yield is the annual dividend payment divided by the stock price. A high dividend yield can be attractive, but it’s also important to consider the company’s financial health and ability to pay dividends in the future.
  3. Check the Dividend Payout Ratio: The dividend payout ratio is the percentage of a company’s earnings that are paid out as dividends. A high payout ratio may indicate that the company is overpaying dividends, which could make it more difficult for them to continue paying dividends in the future.

Dividend growth investing can be a great way to earn a steady stream of income from your investments while also reducing your exposure to market volatility. By following the guidelines outlined above, you can choose dividend stocks that are likely to provide you with long-term, reliable returns. While fixed income investments such as bonds can provide a stable source of income during times of low interest rates, they may not be as effective during times of rising interest rates. Dividend growth investing can provide a more flexible, inflation-hedged, and diversified source of income that has the potential for both income and capital appreciation.

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