Why Dividend Growth Investing Is A Winning Strategy

Includes: CL, JNJ, KMB
by: David Crosetti

One of the objectives of the Retirement Portfolio for Do It Yourselfers was to show that a portfolio of dividend growth stocks could deliver outstanding results for the older as well as the younger investor. All of the companies in the 10 stock portfolio lived up to expectations and one of them, McDonald's (NYSE:MCD), not only delivered a nice income stream, but a large capital gain as well.

Many of the companies in the portfolio are seen by non-dividend growth investors as being boring companies. The truth be known, I prefer the boring companies. They usually deliver a lot less stress and they act like a Timex watch. They take a licking and keep on ticking.

I'd like to give you a snapshot of three companies that were in the portfolio. Many of you already own these companies and some of you do not. I want to show you how these three Dividend Champions performed over a six year period, as it relates to income growth. The stocks I will highlight are Kimberly Clark (NYSE:KMB), Colgate Palmolive (NYSE:CL), and Johnson and Johnson (NYSE:JNJ).


The original $10,000 investment grew, with dividends reinvested, to $18,659 or 86.5% over six years. The original investment was for 160 shares and at the end of the reporting period, the portfolio had an additional 26.95 shares for a total of 206.95 shares.

Income grew annually, accelerated by the additional "free" shares as shown below. The actual income stream grew at a greater percentage than the actual dividend growth rate. Income grew 103% in 6 years, the dividend grew 82%.


The original $10,000 investment grew, with dividends reinvested, to $14,963, a 49.6% over six years. The original investment was 168 shares and at the end of the reporting period, there were an additional 42.76 shares for a total of 201.76 shares.

As with Colgate Palmolive, KMB income grew faster than dividend increases, due to the reinvestment in new shares. Income grew 73% while the dividend grew 43% in 6 years.


The original $10,000 investment grew, with dividends reinvested, to $12,224 or 22.2% over six years. This was the "worst" performing stock in the portfolio from a pure growth standpoint. The original investment in JNJ was 160 shares and with reinvestment, we received another 31.28 shares for a total of 191.28 shares at the end of the six year period.

JNJ, while the lowest performer in the portfolio, still increased income annually, at a rate faster than the increase in dividends. Income grew 79% while dividends grew 54%.

What We Can Learn

These are results from 3 companies in a real 10 company portfolio. The intention here was to take a top performer, a middle performer and a lower level performer and analyze income growth as well as dividend growth relationships.

  1. Dividend Growth stocks can provide a source of increasing income for older investors, who can eventually use the dividend income to fund their retirement years.
  2. Dividend Growth stocks can provide a source of increasing income for younger investors who can use that income to purchase additional shares of the same companies--or use that income stream to enlarge their portfolios with new additions.
  3. Even though this portfolio was created in January 2006 and it enjoyed good years in 2007 and 2008, the portfolio and the markets took a major decline in 2009 and this portfolio prospered in spite of that.
  4. While the SP 500 has not returned to its high point of 1500 back in 2007-2008, the portfolio still managed a total return of 68.5% as of the market close of 12/15/2011.
  5. I think we have demonstrated how Dividend Growth Investing has been a successful strategy for a six year period in time that experienced a major market setback, but with good stock selection and increasing divided growth rates, the strategy is clearly a winner.


Young or old, Dividend Growth Investing is more than a theory. It is a tested strategy for growing portfolio value and providing investors with an income stream to fund retirement years or to have capital for reinvesting. Too many people take the approach that there are better ways to invest. I'm not going to say that this is the only way, but it is a very effective way.

Even with a company like JNJ, one that many people refer to as "dead money," the implications are enormous. A stock with literally no price movement over six years grew its income stream every year and did so by more than 10% a year! When was the last time you got a 10% raise at your job? Social Security? And this company grew less than all the other stocks in the portfolio.

I don't think that anyone can say, with a straight face, that Dividend Growth Investing doesn't "work" or that it is a matter of "foolishness" anymore.

Disclosure: I am long CL, KMB, JNJ.