Given dividend growth investing has a reputation for being the strategy of choice for older investors and retirees, it sometimes suffers from certain misconceptions. There is occasionally a perception that dividend investing is not a growth oriented strategy and offers little opportunity to get strongly rising dividend income or generate significant capital growth. In my opinion, these views are incorrect.
I view dividend investing as perfect for younger investors or older investors looking for long term growth in dividend incomes as well as significant capital growth. I will outline below my view on some of these incorrect perceptions.
Only companies with limited growth prospects pay dividends
There is a misconception that only mature slow growing businesses pay dividends and that more rapidly growing companies are too busy reinvesting in their businesses to consider paying out dividends. While that may be true for some of the traditional dividend payers such as the telecommunications companies like Verizon (VZ) and AT&T (T), there are a host of dividend paying companies that are still growing revenues and earnings well above GDP growth rates.
Verizon and AT&T are in a more mature growth phase in their respective businesses which allows them to pay out a substantial amount of their earnings in the form of dividends. Revenue growth for ATT has been approximately 1% annually over the 2008 to 2012 period. Not surprising, dividend growth has only been approximately 2% per annum over this period as well.
However a blanket judgment that all dividend payers are at similarly flat levels of growth does much disservice to the broad universe of companies that are paying dividends.
Medtronic (MDT) provides a range of medical therapies, with a particular focus on pain management. Since 2003, Medtronic has grown revenues at 7% annually for the last 10 years. Earnings per share have grown at just under 9% annually for the last 10 years. Medtronic is very clearly growing at rates well in excess of GDP and growth in dividends paid reflect this. Medtronic offers a yield of 2% and has provided solid dividend growth of 15% annually since 2003.
Apple (AAPL) provides a range of consumer electronics products. While the company has only been paying dividends for the last few years, Apple has grown revenues at almost 60% annually since 2007 with earnings per share growth of 83% over the last 5 years. Apple started paying a dividend in 2012, a year in which it had year over year revenue growth of 50% . Apple offers a yield of 2.3%
Visa (V) operates in the fast growing payments sector, with exposure to growing credit payments volume internationally as well the emerging mobile payments market. Since its 2008 IPO, Visa has grown revenues at 14% annually with earnings per share growth of 35% annually. Visa offers a dividend yield under 1%.
Beyond the traditional utility and telecom paying dividend companies, there is substantial growth in revenue and earnings to be had amongst dividend payers, if you happen to know where to look.
You can't have substantial capital growth with dividend paying companies
Again, another major misconception is that dividend investments provide poor capital growth. Investors who have had long term investments in companies such as McDonald's (MCD) and The Coca-Cola company (KO) have not only benefited substantially from rising dividend incomes, they also have large portfolio account balances for their troubles as well.
Investors who invested $10,000 in McDonald's in 2003 have not only seen dividends per share increase 24% annually over this period, but have also had strong capital growth. $10,000 invested in McDonald's stock in 2003 would be worth close to $80,000 today.
For a demonstration of the power of long term wealth creation with dividend paying stocks consider Coca Cola and Wal-Mart (WMT) stock performance over 30 years.
An investor who invested $10,000 in Coca Cola in 1983 would have a holding valued at $715,000 today. That's an annual return of almost 15% over this period.
Similarly, an investor in Wal-Mart stock over the same 30 year period would have an investment value today of almost $807,000, representing an annualized return of just under 16%.
Of course investors in both these stocks would have picked up pretty hand rises in dividend income over the years. I can attest to this pattern myself. I started my dividend investing more than a decade ago and have managed to build up an annual dividend income of more than $25,000 today. During this time, rising capital growth has also accompanied the strong dividend growth that I have received.
What is lost for many investors who only see the income provided by dividend stocks is the virtuous cycle of income and capital growth that occurs for dividend companies that pay a rising dividend. Stocks that pay a rising dividend create wealth, and this typically occurs as investors bid up stocks paying progressively rising yields which ultimately serves to bring yields down and generates stock price growth.
No exposure to rapid international growth
Finally, there's a perception that dividend growth investing doesn't allow investors to get exposure to faster growing international markets. Again that perception couldn't be further from the truth.
Many of the classic dividend growth companies have significant international presence. Coca Cola for instance, earns close to 75% of its revenues from international sales. Similarly, McDonald's earns close to 65% of revenue from international markets. So larger, more established, dividend-paying companies have significant exposure to global growth.
However there is also opportunity to have more pure play exposure to international dividend paying companies. Listed American Depository receipts (ADR's) can get you access to international pharmaceutical dividend payers such as Novartis (NVS) based in Europe which has managed to grow dividends 17% annually over from 2003 to 2012 and offers a yield of 3.5%. You can also get exposure to Australian Banks such as Westpac (WBK) in Australia which has grown dividends 10% annually since 2003 and offers a yield of 6.2%.
In fact, going internationally in search of dividends can benefit your overall portfolio. International economies are in different economic cycles with different rates of economic growth at any point in time. While the U.S. and Western Europe have experienced low rates of economic growth for the last few years, economies across the Asia-Pacific region have been experiencing strong growth. Investing in international dividend payers can smooth out downturns in the U.S. economy that depress dividend growth.
While dividend stocks are well known for their consistent steady income potential, the fact is that there are dividend paying companies with exposure to faster growing sectors that are experiencing rapid dividend income growth as well as strong capital growth. Dividend paying companies can and do provide access to substantial wealth accumulation, if you are patient enough to have a long term strategy. For a younger investor, this not only opens the door to a consistent, high quality passive income stream for financial independence, but good long term portfolio growth as well.