Last Updated on July 12, 2024 by Chin Yi Xuan

One of the most powerful dividend investments is the one that raises its dividend payout on a consistent basis.

In this post, let’s explore one of the most important investing strategy as a dividend investors: Dividend Growth Investing!

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Overview: What is dividend growth investing?

Dividend growth investing is an investing style that involves investing in assets that consistently increase their dividend (or distribution) payout.

For instance, a company has grown its dividend by paying $0.10/share in dividends in 2022, $0.12/share in 2023, and $0.15/share in 2024.

Generally, as a dividend growth investor, you can expect your dividends to grow over time.


3 basic dividend investing terms you need to know:

There are 3 dividend investing terms that you need to understand before we proceed. (p.s. Please click on each term for a more detailed explanation):

  • Dividend Yield: Dividend yield is an expression of dividends in the form of percentage (%), relative to the share price.
  • Yield-on-cost (p.s. Please make sure you understand this before proceeding): Yield-on-cost is the dividend you get from your investment, divided by the original cost of the investment.

#1 Dividend growth investing via stocks

One way to do dividend growth investing is by investing in stocks that tend to increase their dividends.

Dividend Growth Stock Case Study: Apple (AAPL)

An example of a company with a history of increasing dividends is Apple (AAPL). Let’s do a quick 10-year dividend analysis on Apple:

Financial YearDividend Payout ($)Annual Payout GrowthYield-on-Cost if you invested on 2/1/2014 (Entry Price: $17.35/share)
20230.9504.40%5.48%
20220.9105.20%5.24%
20210.8657.12%4.99%
20200.80756.25%4.65%
20190.7607.80%4.38%
20180.705014.63%4.06%
20170.615010.31%3.54%
20160.55759.85%3.21%
20150.50759.98%2.93%
20140.46142.66%

From the above dividend data, we can see that Apple has consistently grown its dividends for the past 10 years (2014 – 2023).

Investing in Apple 10 years ago: What would this mean to you?

If you invested in a unit of Apple share 10 years ago at $17.35/share, your yield-on-cost in the first year was just 2.66%.

However, by 2023, your yield-on-cost would be 5.48% (based on your entry price of $17.35).

Let’s find out how much dividends you’d get by owning 10,000 units of Apple share from 2014:

  • During the first year (2014), you’ll be paid $4614 in dividends (10,000 units x $0.4614), which translates to 2.66% in dividend yield.
  • 10 years later (2023), your original 10,000 units of Apple shares will pay you $9,500 in dividends (10,000 units x $0.95), translating to 5.48% in dividend yield.

Thanks to the growth in dividends, your dividend payout increased from $4,614 to $9,500 in 10 years – an incredible 105% growth!


#2 Dividend growth investing via ETF

Another way to execute a dividend growth strategy is by investing in Exchange-Traded Fund (ETF) that tend to grow their dividends.

READ: A beginner’s guide to Exchange-Traded Fund (ETF)

Dividend Growth ETF Case Study: Schwab U.S. Dividend Equity ETF (SCHD)

An example of an ETF with a record of increasing its dividend consistently is the Schwab U.S. Dividend Equity ETF (SCHD). Let’s do a quick 10-year dividend analysis on SCHD:

Financial YearDividend Payout ($)Annual Payout GrowthYield-on-Cost if you invested on 2/1/2014 (Entry Price: $26.45/share)
20232.65803.77%10.05%
20222.561513.90%9.68%
20212.249010.88%8.50%
20202.028417.64%7.67%
20191.724219.79%6.52%
20181.43936.96%5.44%
20171.34576.97%5.09%
20161.25809.72%4.76%
20151.14669.52%4.33%
20141.04693.96%

From the above dividend data, we can see that SCHD has consistently grown its dividends for the past 10 years (2014 – 2023).

Investing in SCHD 10 years ago: What would this mean for you?

If you invested in a unit of SCHD 10 years ago at $26.45/share, your yield-on-cost in the first year was just 3.96%.

By 2023, your yield-on-cost would be 10.05% (based on your entry price of $26.45).

Let’s find out how much dividends you’d get by owning 10,000 units of SCHD from 2014:

  • During the first year (2014), you’ll be paid $10,469 in dividends (10,000 units x $1.0469), which translates to 3.96% in dividend yield.
  • 10 years later (2023), your original investment in SCHD will pay you $26,580 in dividends (10,000 units x $2.6580), translating to 10.05% in dividend yield.

Thanks to the growth in dividends, your dividend payout increased from $10,469 to $26,580 in 10 years – a whopping 153% growth!

READ: My review on SCHD ETF (why this is my favorite dividend growth ETF)


Why do I choose dividend-growth ETFs over dividend-growth stocks?

There is no one absolute right way to invest since everyone has different goals and aspirations.

Reason #1: Dividend growth ETFs suit my passive investing style

Personally, I choose to invest in dividend growth ETF (such as SCHD) as it is a more passive way to do dividend growth investing.

  • I am not a fan of investing in individual stocks:
    • Investing in individual stocks means I will always have to be on the lookout for the next dividend growth stocks as my current stock may cut its dividends someday.
    • It is an active effort which I am not keen in doing.
  • I like how effortless ETF investing is:
    • Investing in ETF means I am investing in a basket of stocks that are included as they fulfill the criteria (or methodology) of the ETF. When a stock fails to fulfill the selection criteria, it will be routinely replaced by another stock that is a better fit.
    • This selection practice is done automatically by the fund manager, requiring no additional effort from the investor.

Most dividend growth ETFs have a stock selection criteria that ensures that only quality dividend stocks are included.

Reason #2: ETFs have selection criteria (a.k.a. Methodology) in place

As an example, for SCHD, stocks are selected based on the following criteria:

  • Dividend payout: Minimum 10 consecutive years of dividend payments.
  • Size of the company: Minimum Float Adjusted Market Cap of $500 million.
  • Liquidity: Minimum three-month Average Daily Volume of Trading of $2 million.

Then, qualified stocks are further ranked as per the following criteria:

From the above methodology, this gives me confidence that I am investing in a basket of quality dividend growth stocks by investing in SCHD.

READ: My review on SCHD ETF (why this is my favorite dividend growth ETF)

SCHD ETF review dividend investing
Click on picture to read my SCHD review

Why dividend growth investing?

Dividend growth is one of the strategies I use while building my Freedom Fund, with dividend growth ETFs like SCHD and FUSD making up close to 20% of my Freedom Fund.

Read: My review on FUSD ETF (Ireland-domiciled ETF)

3 key advantages of dividend growth investing:

  • Given time, dividend growth is a great dividend investing strategy as you can expect to receive more dividends from the stocks or ETFs that increase their dividends consistently.
  • Aside from a steady rise in dividends, investors tend to also enjoy returns in the form of capital appreciation (ie. Increase in stock price) from most dividend growth stocks/ETFs.
  • If you plan to live off your dividends one day, dividend growth strategy is also an effective way to combat inflation.
    • If you own a dividend stock or ETF that grows its dividends by an average rate of 8% annually (ie. You get paid 8% more (on average) every year), it will beat a 3% inflation. This prevents your buying power from eroding when you live off your dividends.

Who should do dividend growth investing?

I think dividend growth strategy is a decent choice for:

  • Dividend investors with a longer investing time frame before they need to live off their dividends, ideally 10 years or longer.
  • Investors who are looking to build a steady & growing cashflow from dividends.
Chin yi Xuan - No Money Lah Investing strategies
Click on picture to read my investing approach as I turn 30

Try it yourself: How to identify dividend growth stocks/ETF (for US market)

Seeking Alpha is a platform providing extensive information on the US stock market.

There’s a FREE version that everyone can use (with most features restricted), you can still see if a stock/ETF has been raising its dividends consistently.

Step 1: Head over to Seeking Alpha’s site (click HERE) and search for the stock you are looking to research:

Step 2: Under ‘Dividends’, select ‘Dividend Growth’

Step 3: Scroll to the ‘Dividend Growth’ section and you’ll find the dividend payout history of the stock/ETF:

You can also see the annual payout growth of the stock/ETF under ‘Dividend Growth History’:


Risks & Caveats of Dividend Growth Investing

#1 Risk of dividend cuts

The biggest uncertainty a dividend growth investor must face is the risk of a stock or ETF stop growing its dividends, or even cutting its dividends, especially during a difficult market/economic condition.

As such, it is important to:

  • Select stocks and ETFs with a consistent dividend growth history. That said, a healthy record of dividend growth is still not a guarantee of future dividend growth.
  • For individual stocks, select companies with a growing revenue and healthy cashflow. This ensures that the dividend growth is sustainable.

#2 Time & patience are the ultimate recipe

A caveat to effective dividend growth investing is it will take time.

Hence, it may not suit investors with a shorter investment time frame (especially if you plan to live off your dividends in <10 years).

Furthermore, dividend growth investing tend to be boring and less exciting compared to the latest hype in the market.

If you invested in SCHD in 2014, your yield-on-cost is just 3.96%, which can be discouraging for investors that have no patience to let their dividends grow.

#3 Dividend withholding tax

Dividend withholding tax is something dividend investors should be aware of while investing.

Awithholding’ tax is a method that a country uses to collect taxes from non-residents who have derived income from the country.

For example, Malaysians investing in US-listed stocks and US-domiciled ETFs will incur a 30% dividend withholding tax.

One work-around is to invest in markets that charge a more efficient dividend withholding tax. For Malaysians, investing in Malaysia, Singapore and Hong Kong stocks and domiciled-ETFs, for instance, comes with 0% dividend withholding tax, while Ireland and Canadian-domiciled ETFs charge a 15% dividend withholding tax.

I will discuss this workaround in more detail in future posts.

p.s. There are also instances where it makes sense to invest in the US stock market for dividends, despite the 30% dividend withholding tax. For me, SCHD is such example as it has one of the most consistent dividend growth track record among dividend ETFs.

READ: To learn more about dividend withholding tax, click HERE.

Dividend Withholding Tax for Malaysian investors
Click on picture to learn about dividend withholding tax

Verdict: Consider incorporating dividend growth investing in your dividend portfolio

When it comes to dividend investing, most investors tend to go for the stock with the highest dividend yield.

However, dividend investors with a longer investing time frame should give dividend growth investing a try. Most stocks or ETFs that grow their dividends consistently (like Apple and SCHD) tend to start with a lower dividend yield, but would turn out to be an attractive dividend beast with time.

What are your thoughts on dividend growth investing? Feel free to share your thoughts and questions with me in the comment section below!


Disclaimers

Past performance is not indicative of future performance.

This post is produced for general information purposes only. It is not intended to constitute professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.

The inclusion of Interactive Brokers’ (IBKR) name, logo or weblinks is present pursuant to an advertising arrangement only. IBKR is not a contributor, reviewer, provider or sponsor of content published on this site, and is not responsible for the accuracy of any products or services discussed.