In a near-zero interest environment and amid a series of
drastic dividend cuts, investors are seeking consistent and safe income thereby
driving the appeal for dividend investing. Though the strategy doesn’t offer
dramatic price appreciation, it is a major source of consistent income for
investors in any type of market.
In fact, investors are zeroing in on stocks that not only
offer dividends but also consistently increase their payout. Stocks that have a
strong history of dividend growth as opposed to those that offer high yields
form a healthy portfolio with more scope for capital appreciation.
Dividend Growth 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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