A Look into the Power of Dividend Investment Strategy
Some investors may view dividend stocks as unexciting or dull. However, these types of investments have been anything but boring in terms of their returns. In the past half-century, they have performed over twice as well as stocks that don't offer dividends.
One exchange-traded fund (ETF) has demonstrated the potency of investing in dividends by providing an annualized return of 12.9% since its establishment nearly a decade ago. Let's delve into the factors that make this dividend investment strategy so effective.
Centering on Top-Performing Dividend Stocks
The ETF's strategy is straightforward: it follows the performance of 100 high-yield dividend stocks as measured by a well-known index. This index filters companies based on four dividend quality characteristics, including dividend yield and five-year dividend growth rate. The emphasis on dividend growth is particularly noteworthy.
Historically, companies that consistently increase their dividends yield the best returns in the long run. One significant reason for this is the combination of income and earnings growth. The steadily rising dividend income offers investors a consistently increasing base return, while their growing earnings push the share price higher.
This ETF includes 100 companies with superior dividend yields that are raising their payouts at rates above the norm. For instance, in the spring of its last annual reconstitution, the 100 companies included in the ETF had an average dividend yield of 3.8% and had been increasing their dividends at an 8.4% annualized rate. This is considerably more than the current 1.2% yield of the S&P 500, which has provided a 5% compound annual dividend growth over the last five years. The ETF's higher yield and dividend growth rate are expected to drive greater total returns in the long run.
Offering Substantial Returns for Dividend Investors
Two of the ten top holdings of the fund are well-known beverage companies. Both companies have a 4% allocation in the fund and are considered top-tier dividend growth stocks. One offers a 2.6% dividend yield, while the other's payout is 3.4%.
Recently, one of these companies increased its dividend by 4%, maintaining its growth streak for 64 straight years. This keeps the company in the exclusive group of Dividend Kings, companies with a history of 50 or more years of consecutive annual dividend increases. Since 2010, this company has paid out over $100 billion in dividends. On the other hand, the second beverage company also recently raised its dividend by 4%, extending its streak to 54 consecutive years. This beverage and snack business has seen its payout grow at a 7% compound annual rate since 2010.
This steady growth has yielded significant dividends for shareholders over the years. Since the 90s, an investment in the first beverage company has provided a 10.6% annualized total return, while an investment in the second company has offered a 10.4% annualized total return.
Both beverage companies are well-positioned to continue increasing their high-yielding dividends. The first company's long-term goal is to achieve 4% to 6% annual organic revenue growth and 7%-9% earnings-per-share growth. Simultaneously, the second company has similar long-term targets of mid-single-digit organic revenue growth and high-single-digit earnings-per-share growth. Their increasing earnings should enable these renowned beverage businesses to increase their dividends while also providing solid price appreciation, aiding in continuing to provide impressive total returns.
Leveraging Dividend Growers
The ETF's investment strategy of focusing on high-yielding dividend growth stocks has proven beneficial over the years. As companies like the two beverage giants have increased their dividends, the ETF has received an increasing stream of dividend income to distribute to investors, while also benefiting from the growing value of its stock holdings. This successful strategy is expected to continue to pay dividends for investors, making the ETF an ideal long-term holding.