Three Types of Dividend Growth Stocks
There are three types of dividend growth stocks. I believe that a diversified portfolio can have exposure to all three types, though I'd probably try to focus more on the second and third type. But I still have a chunk in the first type too. These criteria are not set in stone, but basically are examples of how I group companies in general, and the trade-offs between yield and growth.
The first type includes higher yielding companies, which have a lower dividend growth rate. An example could be Verizon (VZ) or Realty Income (O). They are good companies for current income, but their dividend won't grow by much. They have higher payout ratios, which may expose them to risks in case the business model experiences turbulence.
The second type includes companies in the sweet spot, who have moderate dividend yields and moderate dividend growth rates. An example includes something like PepsiCo (PEP) or Johnson & Johnson (JNJ). These are slow and steady companies, that are perfect for building and retaining wealth and income. Over long periods of time, these companies deliver amazing results. However, they do not always shine in the short-term, which is why they are usually ignored. These types of companies are frequently fairly valued and in my opinion a good foundation behind every portfolio.
The third type includes companies that have lower current yields, but have above average dividend growth. Examples include Visa, Microsoft, Tractor Supply, Dollar General and Broadridge Financial. These companies offer the promise for future growth, but they may often be overvalued too. These companies can often deliver high future yields on cost for patient long-term investors, provided they keep on executing on their business plans.
As I mentioned above, I believe it is helpful to build a portfolio that may have all three types of companies. Overweighting or underweighting each group has its own sets of trade-offs. I want to have a portfolio that can maintain and grow purchasing power over time, even without adding new money, while also offering a decent average income as well. You may like this article on the blog for more details.
I also wanted to let you know that I made another investment this morning.
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