A couple of weeks ago a bunch of us felt a disturbance in the Force – sadly it was not the new Star Wars movie. Indeed, something terrible had happened. Dividend growth investor darling Kinder Morgan fell from its pedestal after its stock price declined for months. On top of that the company had to announce a dividend cut, basically right after I purchased my first shares.
Compared to other investment strategies out there, dividend growth investing is unlike any other. By the very definition of the word it’s not just investing, neither is it investing for dividends. It’s dividend growth investing, with the growth part being key – and the reason why the strategy draws me so much.
Dividend growth investors are interested in just one thing: stable dividend payments, preferably with a high initial yield and double digit growth rate. However, not all dividend stocks offer a juicy yield on cost or strong yearly increases. Dividends differ between sectors to the point that even the Euro Dividend All-Stars look like a patchwork of industries and yields. But why exactly do some sectors offer a higher yield than others?
At the top of the list of dividend growth investing benefits many a seasoned investor will rank the principle of income diversification through a basket of stocks that throws off dividends. Rightly so, it’s better to receive ten small paychecks worth €1,000 in total rather than one big cheque worth exactly the same amount. Even though it’s easy to diversify your income sources with dividend stocks, only few investors actively pay attention to it.
A couple of days ago new reader Samuck asked me why I bother with individual stocks when my ETFs seemed to be performing so much better, which you can clearly see in my latest net worth update. Although I’ve discussed my preference for dividend growth stocks in the past, I feel like his question touches opon a another point that’s often brought up: do I benchmark my dividend growth portfolio to an index and, if so, why?