Why Investors Should Consider Dividend Growth Stocks - (2024)

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

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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 arethousands of dividend stocks to choose from, finding the best onescan seem like a daunting task. To make the search much easier, wefocus on stocks that have earned a place on the prestigious DividendAristocrats list. The Dividend Aristocrats are a group of 64companies in the S&P 500 Index, with at least 25 consecutiveyears of dividend growth.

Even better, manyof the Dividend Aristocrats appear to be undervalued today. In thisarticle, we will provide an overview of our methodology and whyinvestors should consider dividend growth investing.

Focus OnFundamentals

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

This is one bigreason why we recommend the Dividend Aristocrats—they representsome of the strongest U.S. businesses, with long track records ofgrowth. The Dividend Aristocrats widely possess a number ofattractive business qualities that has enabled their long-termsuccess. Broadly speaking, the Dividend Aristocrats have dominantpositions in their respective industries, with strong brands thatgenerate billions in sales every year.

With leadingbrands, global economies of scale, and the financial resources toinvest in research and development, the Dividend Aristocrats havegenerated consistent earnings growth for many years. Thisgrowth—along with a commitment to returning cash toshareholders—are how the Dividend Aristocrats have achieved theirlong track records of dividend growth.

Just a few of the64 Dividend Aristocrats include Procter & Gamble (PG), Johnson &Johnson (JNJ), Walmart (WMT), and Chevron (CVX). Procter & Gambleand Johnson & Johnson are members of an even more exclusive club,the DividendKings, which have raised their dividends for at least 50consecutive 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 February10^th, the highest-yielding Dividend Aristocrats are ExxonMobil (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, theDividend Aristocrats have even continued to raise their dividendseach year during recessions. The past 25 years have encompassedmultiple periods of war, economic downturns, and other challenges. Byincreasing their dividends for 25 consecutive years (or much longerin some cases), the Dividend Aristocrats have proved they have theability to stand the test of time.

The DividendAristocrats tend to be overlooked by analysts, particularly in thefinancial media. The Dividend Aristocrats do not receive muchcoverage on CNBC or other financial outlets. Most of the attentiongets paid to the stocks showing the largest gains or losses. Growthstocks like Tesla and Amazon tend to dominate the discussion, butslow-and-steady dividend growth stocks have delivered over the longterm.

Many DividendAristocrats are admittedly not the most exciting businesses to investin, such as industrials, health care or consumer products. But inreturn, these seemingly boring businesses have staying power, byincreasing their dividends each year regardless of the swings of thestock market.

DividendAristocrats: Outperformance With Lower Volatility

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

Not only did theDividend Aristocrats outperform the broader market in the pastdecade, they did so with less stock volatility. Standard deviation isthe most widely-used measure of volatility in the stock market. Inthe past 10 years, the Dividend Aristocrats had a standard deviationvalue 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 investorscan succeed with the Dividend Aristocrats as well, thanks to theirlong-term growth and historical track record of outperformance. Forthese reasons, we believe investors of all ages should considerfocusing their portfolios on the best-in-class dividend growthstocks, 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.

MoneyByRamey.com Disclosure

Disclosure: I am/We are long $AAPL $ABT $ADM $ALL $BG $BGS $BP $BUD $CAG $CAT $CLX $CMI $COF $CSCO $DAL $DFS $F $FAST $GD $GE $GIS $GT $HBI $IBM $INGR $IRM $JNJ $JPM $KHC $KMB $KO $KSS $LUMN $MMM $MSFT $NWL $PEP $PFE $PG $SBUX $SJM $SPTN $STAG $STX $T $TSN $UPS $VZ $WBA $WEN $WFC $WMT $WPC $WRK $WY $XOM

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