Lots of people do not understand dividend growth investing. It does not mean investing in a stock that gives you a high dividend yield. Actually, doing that leads to more destruction of wealth.
Dividend Growth investing is positioning for high yield income in the future. Example:
You buy a strong company that's available at a 3% dividend yield right now. But has a track record of increasing dividends and is a growth story, not a dead business
Two components
Dividend Payout ratio i.e. How much profit is distributed as dividend [Example: 40%. If it makes a profit of $1, it gives 40 cents as dividend] It means management has headroom to increase the payout
Profit Growth: As profit grows, same payout means more dividend
Case Study: Starbucks SBUX
Dividend: 0.36/share in 2012.
Imagine you bought when the stock price was $20.
Dividend Yield: 1.8%
Last year, the dividend has increased to $1.49/share
So, on your purchase price, the yield is 7.5%
Imagine where the yield would be in another 5 yrs
The reason I am sharing this....because there are lots of online tools - stock with 8% dividend yield now and people blindly follow them and buy dead businesses only to find that they see massive capital depreciation over a period of time.
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