Dividend investing has been in vogue amid market volatility
and near-zero interest rates. This is because dividend-paying securities are a
major source of consistent income for investors to create wealth when returns
from the equity market are at risk.
Additionally, investors’ drive for income has raised demand
for dividend stocks. In particular, the Fed has turned super dovish and hinted
at no rate hikes through 2022.
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 a greater scope of capital appreciation as
opposed to simple dividend-paying stocks or those with high yields.
Why Dividend Growth Investing Is Better?
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 appears as a
winning strategy when some other parameters are also included.
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