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When investing I like to have a plan. I believe that to be a successful investor it is essential to develop a plan, and stick to it. It takes emotion out of your investment decisions, and lets you know what you are going to do in any situation, even before that situation occurs. Those of you who have read some of my other articles know that I also like to keep things simple. So if I'm able to develop a single plan that works for all eventualities, then I would be very happy. The simpler the plan, the easier it is to execute it. And I want to know that the plan will work in all different situations, whether my stocks go up, or down, are cyclical, or just trade sideways. And that is what dividend growth investing is. A single, simple investment plan that works in all types of markets. Buy quality dividend growth stocks and continue reinvesting the dividends, year after year, as the dividend increases.

As a dividend growth investor, I sleep very well at night because I know that my portfolio will continue to pay me an ever increasing stream of dividends through all kinds of markets, as long as I monitor my stocks to insure that their dividend growth satisfies my needs. And while I am in the accumulation phase, the dividends I receive will be reinvested, thereby producing even more income through the magic of compounding. But as I read articles on SA, I have seen many DGI naysayers talk about total return vs. dividend income, and that as DG investors we are ignoring total return. They seem to think that by focusing on the trees (dividend income) we are missing the forest (total return). I have also seen comments to the effect that dividends don't help you much if the stock price is going nowhere, or even dropping.

I wanted to show that these naysayers are wrong, and that it IS enough to focus on the income. Don't get me wrong. Total return is very important. But if you focus on the dividend growth, the total return will come. It is almost inevitable. To demonstrate this, I created some model stocks to show what kind of total return you would get, no matter what happens to the stock price, if you focus only on the dividend growth.

I created these model stocks by using the Chowder rule. The Chowder rule instructs us to look for stocks that have a yield plus dividend growth rate of 12% or greater. So I created 12 simulations that adhere to the rule, but in two different ways. The first stock has a yield of 3% and a growth rate of 9%. The second stock has a yield of 6% and a growth rate of 6%, so both satisfy the Chowder rule. Each of these stocks was run through 20-year simulations, but with six different outcomes for the stock price. The six different outcomes were:

  1. The stock price goes nowhere. The stock remains the same price throughout the 20 years.
  2. The stock is cyclical, dropping 10% over two years, then rising 12% over the next two. This pattern repeats over the 20-year period.
  3. The stock rises 5% every year for the 20 years
  4. The stock rises 10% every year
  5. The stock drops in price by 1% every quarter over the 20-year span, causing an overall greater than 50% drop in the stock price.
  6. The stock price goes up and down randomly, with a slight tendency toward appreciation (since the market usually goes up over time)

I know that no stock moves so perfectly as scenarios 1-5, that the price changes are much more erratic, but I felt that these scenarios were adequate to demonstrate my point. However, I threw the two random scenarios in to more closely simulate how stocks usually move. Both stocks, the 3% yielder and the 6% yielder, with their respective DGRs, were run through all six of these scenarios, once again with the assumption that all dividends were reinvested.

Here is the full spreadsheet for the first scenario, a stock that starts with a 3% yield, has a 9% DGR over the 20-year period, and a stock price that goes nowhere.

Price stays same (3%Y + 9% DGR)

Date

Price

Shares

Div

Yield

Income

Shares Bought

Stock Value

1/1/13

$100.00

100.00

4/1/13

$100.00

100.75

$0.75

3.00%

$75.00

0.75

$10,150.00

7/1/13

$100.00

101.51

$0.75

3.00%

$75.56

0.76

$10,226.13

10/1/13

$100.00

102.27

$0.75

3.00%

$76.13

0.76

$10,302.82

1/1/14

$100.00

103.03

$0.75

3.00%

$76.70

0.77

$10,380.09

4/1/14

$100.00

103.88

$0.82

3.27%

$84.23

0.84

$10,471.85

7/1/14

$100.00

104.73

$0.82

3.27%

$84.92

0.85

$10,557.46

10/1/14

$100.00

105.58

$0.82

3.27%

$85.61

0.86

$10,643.77

1/1/15

$100.00

106.44

$0.82

3.27%

$86.31

0.86

$10,730.78

4/1/15

$100.00

107.39

$0.89

3.56%

$94.85

0.95

$10,834.17

7/1/15

$100.00

108.35

$0.89

3.56%

$95.70

0.96

$10,930.71

10/1/15

$100.00

109.32

$0.89

3.56%

$96.55

0.97

$11,028.11

1/1/16

$100.00

110.29

$0.89

3.56%

$97.41

0.97

$11,126.38

4/1/16

$100.00

111.36

$0.97

3.89%

$107.12

1.07

$11,243.21

7/1/16

$100.00

112.44

$0.97

3.89%

$108.16

1.08

$11,352.41

10/1/16

$100.00

113.53

$0.97

3.89%

$109.21

1.09

$11,462.68

1/1/17

$100.00

114.64

$0.97

3.89%

$110.27

1.10

$11,574.01

4/1/17

$100.00

115.85

$1.06

4.23%

$121.37

1.21

$11,706.47

7/1/17

$100.00

117.08

$1.06

4.23%

$122.65

1.23

$11,830.40

10/1/17

$100.00

118.32

$1.06

4.23%

$123.95

1.24

$11,955.65

1/1/18

$100.00

119.57

$1.06

4.23%

$125.26

1.25

$12,082.22

4/1/18

$100.00

120.95

$1.15

4.62%

$137.98

1.38

$12,232.92

7/1/18

$100.00

122.35

$1.15

4.62%

$139.57

1.40

$12,374.08

10/1/18

$100.00

123.76

$1.15

4.62%

$141.18

1.41

$12,516.88

1/1/19

$100.00

125.19

$1.15

4.62%

$142.81

1.43

$12,661.32

4/1/19

$100.00

126.76

$1.26

5.03%

$157.46

1.57

$12,833.43

7/1/19

$100.00

128.35

$1.26

5.03%

$159.44

1.59

$12,994.85

10/1/19

$100.00

129.97

$1.26

5.03%

$161.45

1.61

$13,158.30

1/1/20

$100.00

131.60

$1.26

5.03%

$163.48

1.63

$13,323.81

4/1/20

$100.00

133.41

$1.37

5.48%

$180.43

1.80

$13,521.20

7/1/20

$100.00

135.24

$1.37

5.48%

$182.91

1.83

$13,706.58

10/1/20

$100.00

137.09

$1.37

5.48%

$185.41

1.85

$13,894.50

1/1/21

$100.00

138.97

$1.37

5.48%

$187.96

1.88

$14,085.00

4/1/21

$100.00

141.05

$1.49

5.98%

$207.68

2.08

$14,312.40

7/1/21

$100.00

143.16

$1.49

5.98%

$210.78

2.11

$14,526.29

10/1/21

$100.00

145.29

$1.49

5.98%

$213.93

2.14

$14,743.37

1/1/22

$100.00

147.47

$1.49

5.98%

$217.13

2.17

$14,963.70

4/1/22

$100.00

149.87

$1.63

6.52%

$240.21

2.40

$15,226.99

7/1/22

$100.00

152.31

$1.63

6.52%

$244.12

2.44

$15,475.02

10/1/22

$100.00

154.79

$1.63

6.52%

$248.10

2.48

$15,727.10

1/1/23

$100.00

157.31

$1.63

6.52%

$252.14

2.52

$15,983.28

4/1/23

$100.00

160.10

$1.78

7.10%

$279.31

2.79

$16,289.76

7/1/23

$100.00

162.95

$1.78

7.10%

$284.27

2.84

$16,578.99

10/1/23

$100.00

165.84

$1.78

7.10%

$289.32

2.89

$16,873.35

1/1/24

$100.00

168.78

$1.78

7.10%

$294.45

2.94

$17,172.94

4/1/24

$100.00

172.05

$1.94

7.74%

$326.65

3.27

$17,531.80

7/1/24

$100.00

175.38

$1.94

7.74%

$332.97

3.33

$17,871.09

10/1/24

$100.00

178.78

$1.94

7.74%

$339.42

3.39

$18,216.96

1/1/25

$100.00

182.24

$1.94

7.74%

$345.99

3.46

$18,569.51

4/1/25

$100.00

186.08

$2.11

8.44%

$384.42

3.84

$18,992.37

7/1/25

$100.00

190.00

$2.11

8.44%

$392.53

3.93

$19,393.02

10/1/25

$100.00

194.01

$2.11

8.44%

$400.81

4.01

$19,802.11

1/1/26

$100.00

198.11

$2.11

8.44%

$409.27

4.09

$20,219.84

4/1/26

$100.00

202.66

$2.30

9.20%

$455.52

4.56

$20,721.60

7/1/26

$100.00

207.32

$2.30

9.20%

$465.99

4.66

$21,198.06

10/1/26

$100.00

212.09

$2.30

9.20%

$476.70

4.77

$21,685.48

1/1/27

$100.00

216.96

$2.30

9.20%

$487.66

4.88

$22,184.11

4/1/27

$100.00

222.40

$2.51

10.03%

$543.78

5.44

$22,784.00

7/1/27

$100.00

227.98

$2.51

10.03%

$557.41

5.57

$23,355.03

10/1/27

$100.00

233.69

$2.51

10.03%

$571.38

5.71

$23,940.38

1/1/28

$100.00

239.55

$2.51

10.03%

$585.70

5.86

$24,540.39

4/1/28

$100.00

246.09

$2.73

10.93%

$654.41

6.54

$25,263.51

7/1/28

$100.00

252.81

$2.73

10.93%

$672.29

6.72

$25,953.68

10/1/28

$100.00

259.72

$2.73

10.93%

$690.65

6.91

$26,662.70

1/1/29

$100.00

266.82

$2.73

10.93%

$709.52

7.10

$27,391.08

4/1/29

$100.00

274.76

$2.98

11.91%

$794.50

7.95

$28,270.57

7/1/29

$100.00

282.94

$2.98

11.91%

$818.16

8.18

$29,112.40

10/1/29

$100.00

291.37

$2.98

11.91%

$842.53

8.43

$29,979.28

1/1/30

$100.00

300.04

$2.98

11.91%

$867.61

8.68

$30,871.99

4/1/30

$100.00

309.78

$3.25

12.98%

$973.86

9.74

$31,952.09

7/1/30

$100.00

319.84

$3.25

12.98%

$1,005.47

10.05

$32,989.17

10/1/30

$100.00

330.22

$3.25

12.98%

$1,038.10

10.38

$34,059.91

1/1/31

$100.00

340.94

$3.25

12.98%

$1,071.80

10.72

$35,165.40

4/1/31

$100.00

353.00

$3.54

14.15%

$1,206.18

12.06

$36,505.95

7/1/31

$100.00

365.49

$3.54

14.15%

$1,248.85

12.49

$37,797.48

10/1/31

$100.00

378.42

$3.54

14.15%

$1,293.03

12.93

$39,134.69

1/1/32

$100.00

391.80

$3.54

14.15%

$1,338.78

13.39

$40,519.21

4/1/32

$100.00

406.91

$3.86

15.42%

$1,510.89

15.11

$42,202.22

7/1/32

$100.00

422.60

$3.86

15.42%

$1,569.16

15.69

$43,829.65

10/1/32

$100.00

438.90

$3.86

15.42%

$1,629.67

16.30

$45,519.82

1/1/33

$100.00

455.83

$3.86

15.42%

$1,692.51

16.93

$47,275.18

As you can see, at the end of the simulation $10,000 has turned into $47,275.18. This is an annualized return of 8.18%. And that is without any change in the stock price! It is still $100 per share, just like it was 20 years before. In terms of income, by the end of the simulation the $10,000 purchase is producing $6,402.23 in yearly income. Not a bad return for a stock that went nowhere.

Here are the final results for the other scenarios. To save space I did not post the full spreadsheets, but I can send them to anybody who is interested in seeing them.

Price stays same (3%Y + 9% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$100.00

455.83

$3.86

15.42%

$6,402.23

$47,275.18

8.18%

Price is cyclical (3%Y + 9% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$116.54

428.22

$3.86

13.43%

$6,078.62

$51,528.12

8.65%

Price increases 5% per year (3%Y + 9% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$281.03

229.04

$3.86

5.56%

$3,411.93

$65,248.80

9.96%

Price increases 10% per year (3%y + 9%DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$666.80

170.27

$3.86

2.37%

$2,587.11

$114,206.77

13.12%

Price drops 1% per quarter (3%Y + 9% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$44.75

1274.15

$3.86

34.12%

$16,112.50

$61,503.15

9.63%

Price increases randomly (3%Y + 9% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$198.83

274.37

$3.86

8.17%

$4,025.81

$55,643.95

9.07%

Price stays same (6%Y + 6% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$100.00

879.39

$4.54

18.15%

$14,305.10

$91,757.12

11.87%

Price is cyclical (6%Y + 6% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$116.54

814.88

$4.54

15.81%

$13,420.78

$98,581.24

12.28%

Price increases 5% per year (6%Y + 6% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$281.03

347.11

$4.54

6.54%

$6,048.67

$99,119.43

12.31%

Price increases 10% per year (6%y + 6%DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$666.80

229.81

$4.54

2.79%

$4,098.41

$154,295.59

14.85%

Price drops 1% per quarter (6%Y + 6% DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$44.75

3403.34

$4.54

40.16%

$49,019.55

$166,203.35

15.28%

Price increases randomly (6%y + 6%DGR)

Date

Price

Shares

Div

Yield

Income

Stock Value

Ann. Return

1/1/33

$189.68

461.39

$4.54

9.60%

$7,903.51

$89,570.40

11.73%

In every situation the total return is excellent. I believe this shows the power of dividend growth and reinvestment.

In all simulations, starting with a 6% yield and having a DGR of 6% leads to a greater annual return than starting with a 3% yield and having a DGR of 9%. This tells me that my returns will be better if I invest in higher-yielding stocks with medium growth rates, rather than low yielders with higher growth rates.

The worst-case scenario is the one in which you start with a 3% yield, a DGR of 9%, and the stock price does not move at all over the 20 years. And yet this still gives an annual return of 8.18%. Not too bad!

In both cases where the stock price drops by over half, the portfolio still does very well, returning 9.63% for the 3% yielding portfolio and 15.28% for the 6% yielding portfolio. Of course this is the most unrealistic scenario. There is no way a company could raise its dividend by 6% or 9% every year for 20 years and have its stock price end up at less than 50% of where it started. I put this scenario in to satisfy the people who are concerned about what would happen if the stock price dropped over the years. As this shows, as long as the dividend continues to increase, and you continue to reinvest, your results will be fine.

Even with random moves in the stock price the return is 9.07% and 11.73% for the 3% and the 6% yielder, respectively.

Conclusion

I trust in math. By doing this exercise, I have mathematically demonstrated, at least to myself, that under almost any eventuality, as long as I monitor the stocks in my portfolio and make sure that the yield and DGR continue to be adequate, I will do well. This gives me great comfort. But let me reiterate. The results in these simulations are dependent on an adequate yield and DGR. Without these all bets are off. This is why it is essential to start with quality companies that have a long history of raising dividends at a good rate, year after year. This increases your chances of a good yield and DGR continuing in the future.

These simulations show the results for a single stock. But these results should be just as applicable to a whole portfolio, and the total portfolio return should be just as good, as long as you insure that your dividend yield and growth are adequate.

Many things in investing are out of your control. But some things you can control, and it is very important to focus on these things, and incorporate them into your investing plan. There is nothing you can do about stock prices. What happens to the stock price after you buy is out of your control. But two things that are in your control are the yield and the dividend growth rate of the stocks in your portfolio. By monitoring your portfolio to make sure the DGR of your stocks is adequate, you can insure that your total return, over the long run, will be excellent. And if you find that one (or more) of your stocks is not growing its dividend adequately enough to satisfy you, sell it and replace it with a stock with a better yield and DGR.

Thank you for reading my article. I welcome your comments (and criticisms).

Source: Dividend Growth Investing And DRIPs Work Under All Conditions