There are a couple of main reasons why I have I have chosen dividend growth stocks as the first pillar of my investment income.
Why I Like Dividend Growth Stocks that Consistently Increase their Dividend Payout
It isn’t hard to find article after article after study discussing how a large percentage of the total returns of the stock market are predicated on reinvesting dividends as they are revived, but I believe there are other reasons why people should look into a dividend growth strategy.
Companies that have created an expectation of a Growing Dividend Payment Will Want to Meet those Expectations
The first metric I use when screening for dividend growth stocks is that the company has increased their dividend for at least 20 year (there are even some companies have increased their dividend for 50+ years). If the company you have been employed to run has done something for 2, 3 or 5 decades do you really want to be the individual who destroys that reputation?
Does that mean the growing income stream is guaranteed? No, but those that make the decision to cut the dividend may consider the history of the company before hastily doing so in order for a quick boost in a company’s EPS.
I Bought a Piece of a Business and I Want to be Treated as Such
When a stock has millions of outstanding shares, I know it is difficult to think of yourself as a business owner holding .000000001% of the company, but that is in fact what you are, and as such you expect to share in the profits behind just a promise for a future gain at some undetermined date in the future. You wouldn’t buy a piece of real estate based solely on the hope that the future value will be worth more to someone else. You buy it because of the income stream, and the hope that it will be worth more in the future.
It may be more Advantageous to Use the Income Rather than Sell Principal
If we were to take the extreme example of someone’s portfolio having zero dividend income representation, then every time they needed to take a distribution then they would be forced to sell a (or many) shares. If they withdrew funds at a greater rate than the stock grew (over the long term) then eventually they would run out of shares. Alternatively, should a dividend growth investor need funds he or she need only turn off the automatic dividend reinvestment option and receive a check.