Given that the stock market is at its peak, investors are looking for both income and growth in their portfolios. This can easily be achieved by focusing on stocks that not only pay dividends but also consistently increase their payout.  

Dividend Growth: A Winning Strategy

Stocks that have a strong history of dividend growth as opposed to those that pay high yields form a healthy portfolio with more scope for capital appreciation. This is because these stocks act as a hedge against economic or political uncertainty as well as stock market volatility. Simultaneously, these offer outsized payouts or sizable yields on a regular basis irrespective of the market direction.

Additionally, these stocks have superior fundamentals compared to other dividend-paying stocks as dividend growth reflects a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. All these make dividend growth a quality and promising investment for the long term. Further, a history of strong dividend growth indicates that dividend increase in the future is likely. This makes the portfolio healthy and safe.

However, the long history of outperformance by dividend growth stocks compared with the broader stock market or any other dividend-paying stocks does not necessarily mean that they have the highest yields.

As a result, picking dividend growth stocks appear as winning strategies when some other parameters are also included.

5-Year Historical Dividend Growth greater than zero: This selects stocks with a solid dividend growth history.

5-Year Historical Sales Growth greater than zero: This represents stocks with a strong record of growing revenue.

5-Year Historical EPS Growth greater than zero: This represents stocks with a solid earnings growth history.

Next 3–5 Year EPS Growth Rate greater than zero: This represents the rate at which a company’s earnings are expected to grow. Improving earnings should help companies sustain dividend payments.