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Put Dividend Growth To Work In Your Portfolio

|Includes: McDonald's Corporation (MCD)
Without a doubt, 2011 has gotten off to a roaring start for dividend investors and February has lived up to its billing as perhaps the best month of the year for dividend increases. The proof is in the proverbial pudding.

As of Feb. 18, the average dividend increase for S&P 500 constituents has been 12.2%, putting marquee U.S. blue-chips on pace to dole out $222 billion to shareholders this year, according to CNBC.

That's the good news. If we're going to nitpick, we'd say the big banks remain problematic on the dividend front as their payouts are at their lowest levels, going back to 1961, according to KBW. There's another good/news bad news scenario when it comes to dividends.

The bad news being that payouts still have not returned to their pre-crisis levels. That's also the good news because it means dividends have to room to grow.

That's a good segue into my next point about the importance of dividend growth and the powerful impact consistently rising dividends can have on your portfolio over time. As I have mentioned many times before, two of the smartest things income investors can do are to:

  1. Not be wowed by one-time dividend payers or dividend payers that rarely, if ever boost their payouts; and

  2. Make every effort to track the dividend track records of their respective dividend stocks.

On a historical basis, S&P 500 dividends have been growing as the chart below illustrates.

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While that is a compelling chart, it doesn't mean that just buying any old dividend stock is an efficacious strategy. If you're depending on monthly or quarterly dividend checks to supplement your retirement income, you certainly don't want to be involved with stagnant dividend payers. Likewise, if you're building a portfolio and looking to harness the power of compounding through dividend reinvestment it would not be wise to put your money into companies that don't regularly boost their payouts.

Growing dividends also equal increased capital gains and here's a real-life example many investors are familiar with.

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That's a chart of the dividend growth delivered to shareholders of Dow component McDonald's (NYSE: MCD) from 2000-2010. Very impressive. Not surprisingly, when we look at shares of McDonald's from Jan. 3, 2000 to Feb. 22, 2011 we see the stock has nearly doubled. McDonald's shares have surged that much primarily because of rising profits, but the rising dividend sure helped and what fuels a rising dividend? Soaring profits. In turn, the share price rises and we have ourselves a very tidy dividend circle.

The bottom line is that it still pays to stick with some basics: Rising profits + noteworthy dividend track records = higher dividends and that equals returns for your portfolio.

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