Many investors are looking to generate dividend income by building a dividend stock portfolio. Far too often, investors blindly buy stocks with high dividend rates only to later find those dividends reduced or stopped altogether. But, if you find stocks with a high dividend growth rate, your chances of success goes up considerably.
Often, the most successful dividend strategy is to buy a lower dividend paying stock with a high dividend growth rate. High dividend growth rates that are supported by earnings growth from the business is a very desirable combination for investors.
A dividend stock portfolio with an average dividend growth rate of 10% will double your income every seven years. This kind of dividend growth rate supported by earnings growth will allow you to see an increase in your dividend income stream. But it is also likely to increase the value of the stocks in your dividend stock portfolio.
When researching a dividend growth rate strategy in the stock market, here are the kinds of businesses I would look for to build a high-quality dividend stock portfolio that has a good chance of beating the returns of the S&P 500 index over the long run:
This kind of dividend investing is not right for everyone. To do this successfully, you need a long term mindset that says you are going to create a high quality dividend portfolio that has a high average dividend growth rate. Once this is complete you will sit back and monitor your businesses and be rewarded with higher future dividends as the dividend growth rates do their magic.
Let’s take a closer look at three stocks of high quality companies that are growing that also reward their shareholders with significant annual dividend increases:
Mastercard has been on the front lines of the megatrend of shifting away from paper currency and embracing digital currency. They have been so successful that they have grown to a market capitalization size of over $300 billion, with minimal debt on their balance sheet.
As successful as Mastercard has been, the future is just as bright for the continued shift towards digital currencies. Recent studies have estimated that approximately 80% of the financial transactions are still done with paper currency, so there is plenty of growth ahead for Mastercard.
And Mastercard has been very shareholder friendly rewarding its shareholder with significant increases every year. In just the last five years alone, Mastercard has more than doubled its dividend from 67 cents a share in 2015, to $1.60 in 2020. A payout ratio of an incredibly low 24% leaves plenty of room for more dividend increases in the future.
The next featured company is Nike, the successful designer and marketer of athletic footwear, apparel, and accessories
Nike has been an amazing growth story since it started in Oregon in 1964 by Phil Knight. (If you want to read one of the best books out there regarding the history and origins of a business, we urge you to read “Shoe Dogs” about the early years of Nike).
It has grown from those humble origins to one of the top 100 businesses ranked by Fortune. It has more than $35 billion in revenue, with more than 75,000 employees worldwide. Today it has a market capitalization of more than $200 billion, with minimal long-term debt
Although Nike, has been successful historically, the future is just as bright. Its recent strategy change of creating a large direct to consumer business (instead of selling to retailers who sell to the end customer) means that Nike will have a closer relationship with the people using its products.
And Nike has been very shareholder friendly rewarding its shareholder with significant dividend increases. In just the last five years alone, Nike has more than doubled its dividend from 54 cents a share in 2015, to $1.10 in 2020. A payout ratio of an incredibly low 33% leaves plenty of room for more dividend increases in the future.
The last stock is Microsoft, the well-known technology company founded by Bill Gates.
Microsoft has been an amazing growth story. It started as a software company selling Windows software for personal computers. But its future is just as bright with its expanded product offerings with Azure, LinkedIn, Xbox, etc.
It is a very shareholder friendly company paying a dividend that has increased most years by at least 10%. Its dividend has grown more than 70% in just the last five years. And with a payout ratio at a low rate of 30%, there is plenty of room for future increases.
Building a high-quality dividend stock portfolio is the goal of many investors.
Do not buy companies with the highest yield as those dividend payments may not be sustainable.
Instead look for high quality companies with high dividend growth rates that are supported by growing profits from the underlying business. Look for an average dividend growth rate of at least 10% per year for your dividend stock portfolio.
Use the three examples above to get you started with your dividend growth strategy.