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Dividend Growth Stocks: Why They Could Be Your Best Option

One size never fits all. It’s true of clothes; it’s true of investing.dividend increases

This is the answer I give when asked, ”What’s the best investment?” I can’t say, because what’s the “best” investment for one investor could be the lousy investment for another investor.

LogMeIn (NASDAQ: LOGM), a cloud-computing tech company whose revenue grows 22% a year and whose shares trade at 990 times trailing 12-month earnings, might be the best investment for a newly minted college graduate with endless optimism,  $5,000 in expendable graduation money, and a cavalier attitude toward risk.

If LogMeln continues to post 20% annual revenue growth for a couple more years and begins to turn a higher percentage of its revenue into earnings, our newly minted college student just might triple or quadruple his money. If it all ends with a thud, as it likely will, at least time is still on his side to recoup the loss.

But for the newly retired sexagenarian with high risk aversion, dwindling time on his side, and bills that must be serviced from his investment portfolio, LogMeln would never appear on the radar. Perhaps a high-yield, low-volatility stock like Blue Capital Reinsurance Holdings (NYSE: BCRH) best satisfies his needs.

The Appeal of Dividend Growth Stocks

For a certain stripe of investor, an investor with time on his side and the patience to go with it, I can think of no better investment strategy for building wealth than dividend growth.

This point was driven home to me at High Yield Wealth, where the point of the wonders of dividend growth is frequently driven home.

Three of my High Yield Wealth recommendations recently announced annual dividend increases: United Parcel Service (NYSE: UPS), Archer Daniels Midland (NYSE: ADM), and Cisco Systems (NASDAQ: CSCO).

Cisco’s dividend increase was particularly noteworthy: The quarterly payment was increased 11.5% to $0.29 per share (the ex-dividend date is April 4, the payment is April 26). Cisco’s shares subsequently moved higher to hit a 52-week (and a 10-year) high.

UPS’ and ADM’s dividend increases were less munificent than Cisco’s. UPS raised its quarterly dividend 6.4%; ADM raised its quarterly dividend 6.7%. Neither dividend increase ignited investor passions. Both UPS and ADM shares failed to move on the announcement, but the dividend increase still matters. It certainly matters to me, and it certainly matters to many other investors, as the following table reveals.

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We have a couple of important takeaways from the above table.

As the dividend increases, so does the yield on the cost basis, which is calculated on our initial recommendation price. You’ll notice that our cost-basis yield exceeds the current yield that’s calculated on the current price.

The fact that our cost-basis yield exceeds the current yield dovetails to the other important takeaway: share-price appreciation. As the dividend goes, so inevitably goes the share price. When the dividend goes up, the share price invariably tags along for the ride.

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I give our proven dividend growers at High Yield Wealth a long leash, which means I expect to measure the holding period in years, if not decades. High Yield Wealth has existed since January 2011. In September 2011, I recommended Altria Group (NYSE: MO). It’s our most senior dividend-growth recommendation and it proves the wealth-creating power of pairing dividend growth with time.

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I concede that many investors need more immediate income than most dividend growers and dividend growth stocks offer. For that reason, I offer ample high-yield income opportunities from which to choose at High Yield Wealth. That said, investors who bought Altria shares five-and-a-half years ago today own an investment that yields 9% on their initial cost basis.

As for our newly minted college graduate, a high-growth investment like a LogMeln might well be his best investment choice. Then again, it might not be if he is willing to measure his holding periods in years and decades.

As for our newly retired sexagenarian, he could easily have another 20 years left with his mortal coil. He shouldn’t be too quick to lard up on high-yield, low-growth stocks and dismiss the notion that a quality pick among dividend growth stocks  isn’t his “best” investment choice.

 

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