Growing dividends that beat the market (2/3)

In our last article, we talked about the market, psychology, speculation, investing in value stocks, and dividends in particular. Today, we will look more specifically at dividend-paying stocks. growing dividends. Like other dividend-focused investment strategies, this approach is better known in the United States than in Europe. This could change quickly as the baby boomers retire.

The USA is the birthplace of one of the most well-known dividend investment strategies: the famous Dogs of the Dow, which simply involves investing in the top 10 dividend-yielding stocks in the Dow Jones Industrial Average and updating your portfolio only once a year. This market-beating method reportedly yields a annual profitability of 17.7% since 1973. Even if we are usually wary of these stock market martingales, the system pleases us in several respects:

• It is free and costs very little in management fees.
• It is based on a partly value-oriented approach, depending on the price you pay to obtain a dividend
• it does not follow a price trend (momentum), but rather seeks out the unloved of the Dow Jones (contrarian approach)
• The securities making up the index are generally of high quality and generally offer a long history of dividend payments.

Not all authors agree on the real profitability of this strategy, some putting forward lower figures and others that it is based on a past market anomaly that will not recur in the future. The profitability obtained by the Dogs of the Dow since their implementation, however, seems to confirm their sustainability.

However, this strategy also has multiple flaws:

• It only focuses on the Dow Jones and leaves out gems from the S&P 500, the Nasdaq and other international markets.
• It only focuses on dividend yield, which is dangerous because even in the Dow Jones some companies can be in bad shape (think of General Motors!)
• It leaves aside less profitable short-term returns, but which have shown higher growth for many years

For this reason, many have wanted to go beyond this strategy and have started to also look at the quality of the company that pays the dividend, as well as the growth of the distributions offered. Once again, it is the Americans who have a head start, with sites like Dividend Growth Investor Or Dividend Growth Stocks.

The whole point of this strategy is that it provides a passive source of income, which increases every year, even every quarter if we have in wallet several American titles of this type (US companies generally pay their distributions every three months). This explains the enthusiasm of rentiers and retirees for this type of investment, since the growth of dividends more than covers inflation. In addition, with a little patience, the yield obtained after a few years exceeds that of so-called more generous companies. Finally, note that a title offering increasing yields can also be part of the Dogs of the Dow, this is typically the case for Johnson & Johnson, Procter & Gamble and McDonald's.

In short, growing dividends are magical in several respects:

• they impose a certain rigor on the company that pays them
• they cover against inflation risks
• They are sought after by baby boomers
• they benefit from compound interest

Growing dividends not only beat the market, they beat all dividend-paying stocks:

However, and we can see this in the graph above, this method involves a risk identical to the Dogs of the Dow method: the suspension of dividend payments. Companies that have used this practice have even posted negative profitability since 1972! It is therefore essential to select companies that:

• can demonstrate a long history of dividend payments: the economic model is solid and ensures profitability for the company regardless of micro and macroeconomic events
• have room to pay their dividend: the company does not distribute all of its profits to its shareholders, which ensures the payment of future dividends even in the event of a difficult transition.

The interest in selecting quality companies takes on its full meaning with increasing dividends, because the more sustainable the economic model, the more the magic of compound interest can operate: a dividend that grows by 15% per year (like that of Novartis), doubles in just five years. But above all, the pace accelerates with the passage of time: after eight years, it has already tripled, after ten years, it has quadrupled...

Dividend-paying stocks, and those paying increasing dividends in particular, therefore have multiple qualities for anyone who knows how to "tame" them. Like any investment in stocks, and even more so, Investing in dividends takes time, patience and method.

OUR next and last article on the subject will conclude this series by providing some thoughts and suggestions for any investor interested in obtaining a regular and growing income via dividends.

Navigation in the series

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