[UNITED STATES] Investors are increasingly turning to dividend growth investments as a way to generate stable income and build long-term wealth. These investments offer the dual benefits of regular cash payouts and the potential for capital appreciation, making them an attractive option for both income-seeking and growth-oriented investors. In this comprehensive guide, we'll explore three compelling dividend growth investments that deserve your attention: two top-rated ETFs and a lesser-known stock with an impressive dividend growth track record.
Before diving into specific investment options, it's crucial to understand the concept of dividend growth and its importance in a well-rounded investment strategy.
What are dividend growth investments?
Dividend growth investments are stocks or funds that focus on companies with a history of consistently increasing their dividend payments over time. These companies typically have strong financials, stable cash flows, and a commitment to rewarding shareholders through regular and growing dividend distributions.
Why consider dividend growth investments?
Dividend growth investments offer several advantages:
Income stability: Regular dividend payments provide a steady income stream, which can be particularly valuable during market downturns or retirement.
Potential for capital appreciation: Companies that consistently raise their dividends often experience share price appreciation over time.
Inflation protection: Growing dividend payments can help offset the effects of inflation on your investment income.
Quality indicator: A history of dividend growth often signals financial strength and effective management.
Top Dividend Growth ETFs to Consider
Exchange-traded funds (ETFs) offer a convenient way to gain exposure to a diversified portfolio of dividend growth stocks. Let's examine two highly-rated options recommended by Morningstar analysts.
1. T. Rowe Price Dividend Growth ETF (TDVG)
The T. Rowe Price Dividend Growth ETF is an actively managed fund that focuses on companies with the financial health to increase their dividends over time. Here are some key features of this ETF:
Management: The fund is managed by Tom Huber, who has been at the helm since March 2000.
Investment approach: TDVG targets companies that generate high levels of free cash flow, which has helped the fund perform well during market pullbacks.
Dividend growth rate: The fund maintains a dividend growth rate that is, on average, about 250 basis points higher than the S&P 500's.
Target yield: Despite its focus on dividend growth, the fund aims for a dividend yield of 2% to 2.5% for the overall portfolio.
Morningstar analyst Stephen Welch praises the fund's management, stating, "Manager Tom Huber has masterfully steered this strategy since March 2000. True to its name, this fund focuses on companies that are financially healthy enough to increase their dividends over time".
2. Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF is a passively managed fund that tracks the S&P US Dividend Growers Index. Here's what makes this ETF stand out:
Investment criteria: VIG focuses on stable, profitable companies that have consistently increased their dividends for over a decade.
Screening process: The fund eliminates the highest-yielding names from its index to ensure financial stability among its holdings.
Long-term performance: The ETF's established constituents help insulate the portfolio from volatility and may lead to superior risk-adjusted returns over time.
Morningstar analyst Bryan Amour highlights the fund's strengths, noting, "Targeting stocks with 10 years of dividend growth is a strict hurdle that provides a big advantage. It indirectly targets profitable companies that not only have the capacity to increase their dividend payments but also a willingness to do so".
A Hidden Gem: RPM International (RPM)
While ETFs offer diversification and professional management, individual stocks can also play a role in a dividend growth strategy. One such company that has flown under the radar of many investors is RPM International (RPM).
Company overview:
Industry: Paints, coatings, and adhesives
Dividend growth streak: 50 consecutive years of dividend increases
Global presence: Sales in more than 160 countries
Impressive long-term performance:
RPM International has delivered remarkable returns for long-term investors. The company calculates that a $1,000 investment in its stock 50 years ago, with dividends reinvested, would now be worth $1.15 million. This performance significantly outpaces the S&P 500, which would have grown to $178,000 over the same period.
Growth drivers:
RPM International is well-positioned to benefit from global economic growth and infrastructure development. CEO Frank Sullivan highlighted several areas of opportunity in the company's October earnings call:
"You can see that in highway construction, you could see that in the onshoring of manufacturing, you can see that in some expansion in airports. We see that having a pretty good runway" for the next 1½ to two years.
Building a Dividend Growth Portfolio
When considering these dividend growth investments for your portfolio, keep the following strategies in mind:
Diversification: While the two ETFs discussed offer built-in diversification, consider spreading your investments across multiple sectors and asset classes to manage risk.
Regular monitoring: Even dividend growth investments require periodic review. Stay informed about the financial health and dividend policies of the companies or funds in your portfolio.
Reinvestment: Consider reinvesting dividends to compound your returns over time, as demonstrated by the impressive long-term performance of RPM International.
Tax considerations: Be aware of the tax implications of dividend income in your specific situation, and consider holding dividend-paying investments in tax-advantaged accounts when appropriate.
Long-term perspective: Dividend growth investing is typically most effective when approached with a long-term mindset. Be prepared to hold your investments through market cycles to fully benefit from the power of compounding dividends.
Dividend growth investments offer a compelling opportunity for investors seeking both income and long-term capital appreciation. The T. Rowe Price Dividend Growth ETF (TDVG) and Vanguard Dividend Appreciation ETF (VIG) provide diversified exposure to high-quality dividend growers, while RPM International (RPM) represents an intriguing individual stock option with an impressive dividend growth track record.
By incorporating these investments into a well-balanced portfolio and adhering to sound investment principles, investors can potentially enhance their income streams and build long-term wealth. As always, it's essential to conduct thorough research and consider consulting with a financial advisor before making any investment decisions.
WhatsApp
Instagram
Threads
