Dividend Growth Investing has experienced a resurgence in the recent years. I believe there are three main reasons DGI will remain a popular approach for investors for years to come.
Time has passed since 2009. Though people still clearly remember what happened in the Great Recession, consumer confidence has returned somewhat. Businesses are still earning money and the economy has been recovering. Three solid years of gains have encouraged investors who bailed to come back, and portfolio managers are discussing how money is flowing back into the market. Investors have realized that they cannot survive in the current interest rate environment and are looking to dividend stocks to provide the income they need.
The search for income continues with an aging population and growing number of seniors. On January 7, 2011, the Washington Post announced that over 10,000 people in the U.S. will be celebrating their 65th birthday each day for the next 19 years. It's old news, but it will apply for years to come. As the baby boomers approach retirement and retire in droves, increasing numbers of people will be looking for the stable income that dividend paying stocks provide, which is harder to find in other arenas. These investors tend to be conservative and hold positions for longer periods of time and will provide stability to dividend growth stocks.
Stability is a hallmark of dividend growth companies. The kind of companies that can afford to reward investors with growing dividend income are often large, established business whose volatile growth periods have passed. The companies' earnings are also often stable and reasonably predictable as well. There are no shortage of analysts following these companies. Additionally, the kind of investors who are holding stocks for their dividend income are less likely to be buffeted about by market sentiment, and less willing to sell on general economic and less critical company-specific news. This compounds the stability of dividend growth companies.
What does this mean for my portfolio? This past week's market dip hasn't caused me to miss a minute of sleep. Even though many of my holdings have been purchased in the past 3 months, and therefore few have a significant margin between my purchase price and today's market price, I know most of my purchases are solid companies with solid earnings and excellent prospects for the future. With my long time-horizon (20+ years until retirement), short term hiccups are only buying opportunities. Unlike most DGI investors though, total portfolio value is something I am quite concerned about, and will be for the next 10 years or so. Gradually, I will be concerned only about income. Meanwhile I'm working on developing a steady, growing stream of income.
My watchlist currently contains well-known dividend growth names, some Canadian companies, a few foreign and many American companies, many of whom are currently considered overvalued. I have some cash on hand, and contributions flowing into the portfolio bi-monthly, and am looking for attractive entry points into quality companies.
Though I've chosen my holdings carefully, and I would not be willing to part with any of my current holdings without very good reasons, I do have a few that are particularly attractive-- so that if I do not have full positions, I will be buying more. Many of the American companies have had significant runs and valuations are not particularly attractive. Also, I have more funds available in accounts that are not sheltered from withholding taxes, so I'm watching my Canadian names more closely.
Canadian National Railway (NYSE:CNI), has a very modest dividend of 1.7%, leaving it off the list of most dividend growth investors. However, there is attractive dividend growth with only one year (2010) of the past fifteen years being single digit. Additionally, there has been steady share price growth, which has made it worth waiting for the dividend to catch up to. The recent sell-off has provided a tempting entry point.
Royal Bank of Canada (NYSE:RY), Scotiabank (NYSE:BNS) and Toronto Dominion (NYSE:TD) are the most popular of the big five Canadian banks. I own RY & TD and am looking to buy BNS very soon. They tend to trade together with various ones lagging and leading over the years. General sentiment among leading Canadian portfolio managers seems to be that RY is the most undervalued, TD is the market leader and BNS has the most growth prospects with its more global perspective (though nothing in Europe). The banks are expected to give a total return of 15% this year, including the dividends. This will take me to my goals.
RioCan REI, (REI.UN) or (OTCPK:RIOCF) and Morguard REIT (MRT.UN) or (OTC:MGRUF) are positions I'm adding to my portfolio. I haven't held any REITs in the past and I am jumping in for the first time. RioCan is widely considered to be the premier Canadian REIT and is the largest. Though it is not likely to be the best performing, it will be a solid choice with its 5% dividend. The dividend growth is sadly lacking for both of these companies, but the earnings for both are excellent. Morguard REIT has been an excellent performer and has the backing of the Morguard Corporation. Buying both of these names will give me a nice mix; a large solid company and growth company, both with solid earnings and good dividends.
Though it will be painful for the portfolio in the short term, I welcome a correction to purchase these, and more on my watchlist, for long-term holds.
Disclosure: I am long CNI, RY, TD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.