Recently Dividend Growth Investor wrote a post about three different dividend strategies. To quickly summarize, they are:
1. High yield stocks with low to no dividend growth
2. Low yielding stocks with a high dividend growth rate
3. Average yield and an average dividend growth
The question that any investor would obviously ask right at the outset is which one is the best strategy for most people. High yield stocks can be very enticing to investors looking for income due to the high levels of cash flow that they throw off. However it does not take long for a beginning dividend investor to realize that the lure of these high dividend yields is quickly throw off with the huge risk that is taken to get that yield. The yield is high for a reason and it is to offset the massive stock price risk you are taking by buying these high dividend stocks.[ad#tdg-embedded]
The low yielding stocks are often ignored by dividend investors because of their initial low income producing aspects. However, I believe that these stocks should not be overlooked at all because the real power with a dividend growth strategy is the long term benefits due to the compounding nature of the growing dividend. An increasing dividend over time means more money and if you reinvest that dividend more money plowed back into the market. This over time can have dramatic impacts on your portfolio.
The average yielding stocks with average dividend growth is right in the middle. This strategy does not look for stocks with the highest or lowest dividend yield, or the highest or lowest dividend growth rates. Instead it focuses on finding very strong companies that will provide sustainable dividends over time because they have strong fundamentals and can stand the test of time. My experience has shown that stocks on either end of the spectrum tend to not exhibit this stability or even growth.
As you can surely surmise my now, my chosen strategy tends to fall in that average category. First and foremost before buying a dividend growth stock I am looking for those fundamentally strong companies. I certainly want to see that dividend growth, but most important is that the company is strong. I agree completely with DGI when he says, “It is more about finding the stocks with sustainable competitive advantages which allow them to enjoy strong earnings growth, which would be the foundation of sustainable dividend growth”.