Why Investors Should Consider Dividend Growth Stocks

Today, we welcome the guest post, “Why Investors Should Consider Dividend Growth Stocks” from Bob Ciura at Sure Dividend.


Also worth a read: 11 Things to Look for When Look for When Investing in Dividend Stocks

There are many investing styles to choose from. Investors can buy growth stocks, value stocks, dividend stocks, and stocks that are a blend of the three. At Sure Dividend, we believe the best long-term returns are to be found among the highest-quality dividend growth stocks. Dividend growth stocks combine the stability of regular dividend payments, with the potential for a higher share price down the road thanks to their growth potential.

Since there are thousands of dividend stocks to choose from, finding the best ones can seem like a daunting task. To make the search much easier, we focus on stocks that have earned a place on the prestigious Dividend Aristocrats list. The Dividend Aristocrats are a group of 64 companies in the S&P 500 Index, with at least 25 consecutive years of dividend growth.

Even better, many of the Dividend Aristocrats appear to be undervalued today. In this article, we will provide an overview of our methodology and why investors should consider dividend growth investing.

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Focus On Fundamentals

Focus on fundamentals printed on book with calculator and pen.

The stock market can seem like a scary place to put one’s hard-earned money. To combat this perception, investors should remember that buying stocks is essentially purchasing a small piece of a business. While the market price of stocks fluctuates daily, sometimes by large swings in a given day or week, what matters over the long-term are the underlying fundamentals of the business.

This is one big reason why we recommend the Dividend Aristocrats—they represent some of the strongest U.S. businesses, with long track records of growth. The Dividend Aristocrats widely possess a number of attractive business qualities that has enabled their long-term success. Broadly speaking, the Dividend Aristocrats have dominant positions in their respective industries, with strong brands that generate billions in sales every year.

With leading brands, global economies of scale, and the financial resources to invest in research and development, the Dividend Aristocrats have generated consistent earnings growth for many years. This growth—along with a commitment to returning cash to shareholders—are how the Dividend Aristocrats have achieved their long track records of dividend growth.

Just a few of the 64 Dividend Aristocrats include Procter & Gamble (PG), Johnson & Johnson (JNJ), Walmart (WMT), and Chevron (CVX). Procter & Gamble and Johnson & Johnson are members of an even more exclusive club, the Dividend Kings, which have raised their dividends for at least 50 consecutive years.

The Dividend Aristocrats encompass every major market sector, with elevated exposure to consumer staples companies. This makes sense, as consumables like cleaning products, paper towels, toothpaste, and many others are necessary products. There are also a large number of industrials on the list, such as 3M (MMM), Dover Corp. (DOV), Caterpillar (CAT) and several more. The list is under-exposed to the information technology, utilities and real estate sectors.

As of February 10th, the highest-yielding Dividend Aristocrats are Exxon Mobil (XOM) with a 5.7% dividend yield; AT&T (T) with a 5.4% yield; and AbbVie (ABBV) with a 5.0% dividend yield.

Impressively, the Dividend Aristocrats have even continued to raise their dividends each year during recessions. The past 25 years have encompassed multiple periods of war, economic downturns, and other challenges. By increasing their dividends for 25 consecutive years (or much longer in some cases), the Dividend Aristocrats have proved they have the ability to stand the test of time.

The Dividend Aristocrats tend to be overlooked by analysts, particularly in the financial media. The Dividend Aristocrats do not receive much coverage on CNBC or other financial outlets. Most of the attention gets paid to the stocks showing the largest gains or losses. Growth stocks like Tesla and Amazon tend to dominate the discussion, but slow-and-steady dividend growth stocks have delivered over the long term.

Many Dividend Aristocrats are admittedly not the most exciting businesses to invest in, such as industrials, health care or consumer products. But in return, these seemingly boring businesses have staying power, by increasing their dividends each year regardless of the swings of the stock market.

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Dividend Aristocrats: Outperformance With Lower Volatility

All of this means the Dividend Aristocrats can generate long-term outperformance in relation to the broader S&P 500 Index—with lower volatility as well. Consider that in the past 10 years through January 31st, the Dividend Aristocrats generated total annual returns of 13.7%. In the same period, the S&P 500 Index generated total annual returns of 13.3%. This outperformance is notable, especially since the past 10 years included the nearly uninterrupted bull market in the aftermath of the Great Recession of 2008-2009. One would normally expect steady dividend stocks like the Dividend Aristocrats to underperform in a raging bull market, but this was not the case.

Not only did the Dividend Aristocrats outperform the broader market in the past decade, they did so with less stock volatility. Standard deviation is the most widely-used measure of volatility in the stock market. In the past 10 years, the Dividend Aristocrats had a standard deviation value of 11.2%, compared with 12.4% for the S&P 500 Index.

As it has been a full decade since the last recession in the United States, investors may be wondering which stocks could fare better if another recession hits. We expect the Dividend Aristocrats to once again outperform the broader market if the economy enters a downturn. First, the Dividend Aristocrats collectively have a higher dividend yield than the overall market. The Dividend Aristocrats as a whole have a dividend yield of 2.4%; by contrast, the S&P 500 Index has yield of just 1.7%.

Final Thoughts

Investors with either a short or long investing time horizon should consider dividend growth stocks. Retirees who desire cash flow from their investments can receive much higher levels of income from various Dividend Aristocrats than the available alternatives. This is especially true given the current environment of low-interest rates and record-high stock prices.

Younger investors can succeed with the Dividend Aristocrats as well, thanks to their long-term growth and historical track record of outperformance. For these reasons, we believe investors of all ages should consider focusing their portfolios on the best-in-class dividend growth stocks, the Dividend Aristocrats.

Sure Dividend Disclosure

I am/we are long $XOM and $ABBV

Bob Ciura is Senior Vice President of Sure Dividend. He oversees all content for Sure Dividend and its partner sites.

Prior to joining Sure Dividend, Bob was an independent equity analyst. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

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