Best Dividend Growth Shares
Dividend growth investing is a popular strategy due to the attraction of being regularly paid while holding shares for longer term capital gains – in many cases the dividend payments can exceed the cost of interest on holding the investment (that is, it could be positively geared). In addition, the returns on alternative passive investments such as fixed interest are currently quite low. The principle behind the dividend investment strategy is to invest in companies likely to have strong future dividend growth generating an increasing income stream. Dividend income can then be reinvested into more dividend growth shares. Dividend growth investing allows continuous compounding of returns.
Selection of dividend growth investment candidate stocks is difficult as forecasting future dividend growth is unreliable. However, if you believe that stocks that have grown dividends strongly in the past are more likely to continue dividend growth, then you use past performance as a guide. Remember that this is only an initial filter and you should ensure your due diligence is thorough.
A good first step is to look at historical and projected earnings per share growth. Consider a medium time frame such as 3 to 5 years rather than just the current year. You want earnings to be growing at at least the projected rate of inflation, plus a reasonable premium to reimburse you for the risk and opportunity cost of holding your cash in this stock.
An important variable impacting dividend growth is the payout ratio. This is the percentage of earnings that is paid as the dividend. Companies that payout most of their earnings as dividends retain less for reinvesting and the business and dividend growth.A high payout ratio of 50% or more suggests that dividend growth will come mainly from future earnings growth. On the other hand, companies with a low payout ratio can increase dividends from both earnings growth and from a financial management decision to increase the payout ratio.
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