Dividend Growth Investing Can Payoff in the Long Run

If one is a dividend growth investor, they are probably considered (or should be) the longest of the long-term investors.  To the absolute amazement of other investors, once the stock is purchased, the dividend growth investor may not care what the price of that stock is as long as the dividends continue to grow.

The substantial gains that are reaped by re-investing the growing dividends from our favorite stocks lies in the exponential power of compounding - which often takes years to build into a noticeable contribution to a portfolio.

Because the re-investment process can seem unproductive and the dividend growth insignificant at first, it is easy for others to dismiss dividend growth investing as “too conservative” or even unprofitable. As much as we preach that slow and steady wins the race, even the most seasoned dividend growth investor can begin to question the effectiveness of the strategy from time to time.

A Real Life Example

Many times it takes a real life example of dividend growth investing to help to keep one motivated to continue the long , often boring, journey of building a portfolio of dividend growing common stocks.

The recent bid by InBev to take over Anheuser Busch (BUD) provided this motivating real-life example that what the essence of dividend growth investing is all about.

This is what the “end-game” of our dividend growth strategy should look like - it’s beautiful!
In 1980, Sean Gorham bought his first piece of a public company: a $500 investment in Anheuser-Busch, even though he had no connection to the brewer or its St. Louis roots. He’s reinvested the dividends, or the cash payout shareholders receive, over the years.

“I’ve always admired how well the company is run. They exude a very clean image and a very American image,” said Gorham, 48, an insurance agent who lives in York, Maine, about an hour northeast of Anheuser-Busch’s Merrimack, N.H., brewery. “It’s been one of the best investments I’ve had. … The dividend I get every year is more than what I originally paid for” the stock.

Anheuser-Busch stock began being traded in 1933 in the over-the-counter market, where brokers buy and sell among themselves rather than through a stock exchange. The company first was listed on the New York Stock Exchange on April 18, 1980, making it more widely accessible to individual investors.

In the past 28 years, Anheuser-Busch’s stock has split four times. So one share bought in 1980 is now 24 shares - how’s that for creating shareholder value.

It Takes Time And Commitment

Obviously this example is one that has taken nearly 30 years to develop, but the fruits of the labor are tremendous.

Given this example, an investor who today is 30 or even 40 years old could begin to build a portfolio of dividend growing common stocks and expect to receive an excellent income in retirement that grows each year - likely at a rate higher than inflation!

When one commits to the strategy of dividend growth investing, it requires an extreme amount of patience and discipline in the first few years. It may take as many as ten years of dividend growth before the re-invested dividends make significant contribution to the growth of the portfolio.

Reaching The Tipping Point

Many financial planners will dub a person’s working years as the “accumulation phase” of one’s life. This means that during these years (roughly from age 20-65) the purpose of investing is to accumulate assets that will allow the investor to hopefully maintain their current lifestyle in retirement.

During the first decade or two, accumulating assets is the most difficult as investors tend to have other “important” expenses such as purchasing a home, raising a family, retiring student loans and consumer debt etc.

While a full blown discussion on the time value of money is not necessary in this article, one must recognize that buying assets such as dividend growth stocks during the early years of the accumulation phase will allow for the advantages of compound growth to kick in and the tipping point will be reached faster.

The tipping point is the point where the return from investments begins to grow at a greater rate than  expenses. You will notice that one does not say that investment income meets expenses because, it is known that expenses increase with inflation and (mortgage excluded) may actually have increased in retirement depending on medical needs etc.

Motivation To Follow A Proven Path

During the accumulation phase, success stories like the one above can prevent investors from straying from the proven path of investing in solid dividend growth stocks to fund a prosperous retirement.

Where do you get the motivation to stay committed to your investment strategy?

Comments

[User 222963]

I have been a dividend growth investor since 1983. I started with $500.00 and now have over 40k invested. I've pick up a few pointers along with way that I have found useful. (1) Buy 100 shares at a time if possible. (2) Reinvest dividends as long as the yield is above 4%. (3) When the yield falls below 4% let the dividend pay cash and with cash buy or invest in a higher yield stock. (4) Attempt to buy stocks that pay at least $2.50 dividend. There are other points I could make, but this simple plan has made me a lot of money.

[JimHawthorne]

Thanks for the article, Tyler!
User 222963: I believe $500 to $40,000+ represents a compound yield in excess of 19%/annualized, and as this timespan included some pretty stormy times, I'm curious as to how you did it?
Tyler's BUD example is a very good, but doesn't begin to even come close to your numbers!

[THofler]

Hey, thanks for the tip User! I've been focused on div. growth & reinvestment, but am looking at a portfolio with a lot of divs. reinvested at overvalued 2007 prices. Will give your method some thought.

[notsosmart]

i did it with pseg & it worked great. i stopped when i retired & took the div. in cash. last year when the stock more than doubled,i sold for a good profit(15% tax limit. more luck than brains here.

[bill d]

I don'y think that $500 he STARTED

[bill d]

Sorry - I don't think that $500 he STARTED with was all that he invested to get to the 40K. But it's possible if he picked some real winners.

[Whisper OnThe Wind]

I agree with reinvesting dividends, and have a rule of my own - always go with 8% yield or higher. If the dividend is small, buy more of the stock, and it will become bigger faster. Admittedly I've been lucky, but my goal is to provide my own retirement fund this way. I'm just a small fish, but I've had some good luck. I agree with the 100 shares thing, too, if you get a good stock early.

[messy]

User,,,do you try to pick stocks that keep increasing its dividends. I do, as I believe companies that keep increasing their yields are investor friendly. In these times, try electric utility companies like...AEE,,ED,,EDE,, THAT ALL YIELD OVER 5.5%

[truthinvesting]

Great article I retired at 39 using my straegy I outlined on my forum about dividend reinvestment.Altria MORE THAN DOUBLED EVERY OTHER STOCK IN THE S&P FROM 1957 to today