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For dividend investors, one of the keys is to invest in those companies that have a sufficiently high dividend yield that is sustainable and that have high dividend growth rates. Investors focusing only on high yielding stocks run the risk of investing in a company that can not sustain its dividend and then face a dividend cut. Dividend cuts most often have a negative impact on a company's stock price.

As noted by Sudhir Nanda, head of quantitative equity research at T. Rowe Price:

This makes intuitive sense. companies with growing dividends are signaling confidence about their future earnings. They tend to be stable businesses, well positioned in their markets, and able to perform throughout market cycles, which make them good candidates for long-term growth.

The below table details the extra performance gained by those companies that have these dividend characteristics.

Click to enlarge:

From The Blog of HORAN Capital Advisors

Over the long run, dividend growth stocks have outperformed non-growth payers, non-dividend payers and dividend cutters as I have noted in several past posts. Below is a chart separating the stocks by dividend policy for equities in the Russell 1000 Index.

Click to enlarge:

From The Blog of HORAN Capital Advisors

For investors, one factor to keep in mind is dividend paying stocks tend to underperform the overall market in volatile upward market spikes. However, in volatile down market periods, the higher quality dividend growers generally hold up better; and thus tend to outperform over a complete market cycle.

There are many reasons why dividend growth stocks appear attractive in this market environment, not the least of which is they tend to be less volatile. Companies are sitting on record levels of cash and are likely to use some of this cash for increased dividend payments.

The obvious is that stocks are not bonds. However, investors looking to increase their allocation to equities should consider dividend paying stocks. On a year over year basis through September 30th, S&P 500 dividend payments are up over 14%. Year to date through November 8th, for companies that have increased their dividend, S&P reports the median increase is 14.55% and the average increase is 27.82%; 27 companies have at least doubled their dividend. This is an attractive growth rate that income investors aren't likely to find in bonds. More on this strategy can be found in my article, Dividends As An Alternative To Low Bond Interest Rates.

Source: Dividend Growth Stocks May Be Timely As Economy Sputters (pdf)

T. Rowe Price Report, Fall 2011

Source: Dividend Growth Stocks Are Attractive At This Point In The Market Cycle