Though rising yields have dampened the appeal for dividend
investing, a niche corner of this space is still in vogue. This is none other
than the dividend growth strategy. Stocks with a strong history of dividend
growth year over year form a healthy portfolio with greater scope of capital
appreciation as opposed to simple dividend paying stocks or those that pay high
yields.
Stocks that have a strong history of dividend growth belong
to mature companies, which are less susceptible to large swings in the market,
and thus act as a hedge against economic or political uncertainty. At the same
time, these offer downside protection with their consistent increase in
payouts.
These stocks have superior fundamentals as opposed to their
traditional dividend counterparts such as a sustainable business model, a long
track record of profitability, rising cash flows, good liquidity, strong
balance sheet and some value characteristics. They have a history of
outperformance over the long term but not necessarily high dividend yields. All
these makes dividend growth a quality and promising investment metric for the
long term.
Further, a history of strong dividend growth indicates that
dividend increase in the future is likely. This makes the portfolio healthy and
safe. Though these stocks have a long history of outperformance compared with
the broader stock market or any other dividend paying stock, it does not
necessarily mean that they have the highest yields.
As a result, picking dividend growth stocks appear as
winning strategies when some other parameters are also included.
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