With the start of May, investors have turned cautious given
the long history of weak performance during the summer months (May to October)
per the old adage “Sell in May and Go Away.” Amid such a scenario, honing in on
the dividend growth strategy seems to the best practice.
This is because investors can enjoy rising current income
while awaiting capital appreciation irrespective of market conditions.
Why Dividend Growth?
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 as well as
stock market volatility. At the same time, these offer downside protection with
their consistent increase in payouts.
Additionally, these stocks have superior fundamentals that
make dividend growth a quality and promising investment for the long term.
These include a sustainable business model, a long track of profitability,
rising cash flows, good liquidity, a strong balance sheet and some value
characteristics.
Further, a history of strong dividend growth indicates that
dividend increase is likely in the future.
Moreover, a history of dividend growth year over year leads
to a healthy portfolio with greater scope of capital appreciation as opposed to
simple dividend paying stocks or those with high yields. Although these stocks
do not necessarily have the highest yields, they have outperformed for a longer
period than the broader stock market or any other dividend-paying stock.
Thanks for the explanation!
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