Given the decline in yields and the prospect of lower
interest rates, investors are in search of returns. This has raised the appeal
for dividend investing. While there are several dividend stocks that could
provide capital appreciation, honing in on stocks with a history of dividend
growth leads to a healthy portfolio, with greater scope of capital appreciation
as opposed to simple dividend-paying stocks or those with high yields.
Further, dividend-paying securities are the major sources of
consistent income when returns from the equity market are at risk.
Dividend Growth: A Winning Strategy
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.
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.
As a result, picking dividend growth stocks appear as
winning strategies when some other parameters are also included.
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