One of the simplest ways to build wealth in equity investing is to invest in dividend stocks especially dividend payers that grow the dividend rate each year consistently. Dividends provide a stable income stream and the power of compounding with reinvestment usually leads to astonishing returns over many years. I have written many times about the importance of dividend growers in a well-diversified portfolio in the past. Some of those articles are listed below:

When the Dividend Grows the Stock Price Follows: A Case Study

On The Astonishing Power of Dividend Growers: Three Case Studies

Why Dividend Growers Are More Important To Total Returns Than Dividend Payers

Multiple Expansion or Dividend Growth: Which is the Main Driver of Long-Term Equity Returns ?

On The Importance Of Dividend Growth To Long-Term Returns

In the first post above, I quoted the example of Procter & Gamble (PG) as an excellent dividend grower. P&G’s annual dividend growth rate was 8.5% and the annual stock price growth rate was 10.5% from 1980 to 2020.

I recently came across an article that showcased the dividend growth strategy with another example. The Jen Nurick and Josh Veltman of DivGro discussed the strategy with hardware retailer Lowe’s Companies(LOW) as an example. From the article:

While rates of change in dividends and share prices have been shown to ultimately synchronise, they traverse distinct paths with inherently obverse emotional experiences. The fast-rising dividend-growth staircase provides the opposite of an amygdala hijack. It offers microdosed anticipation: regular boosts of positive data points that fortify investor mindsets and prime us for long-term success. Plus, unlike other metrics, which may be massaged, dividends are paid in cash and are extremely telling; cut or increased, consistent or sporadic, fast or slow growing, they open a window into a company’s health span. If volatile prices can engender our fight-or-flight response, think of rapidly rising, consecutive dividend-growth updates as brain fertilisers, arming investors with enough emotional scaffolding to stay the course and enjoy the benefits of compounding.

This approach has roots at MIT, where Professor Myron Gordon and his team demonstrated that over time and at points in time, where the dividend goes, share price follows. For example, if one can identify a company that will raise its dividend annually at 13% for the long arc of time, one should expect its share price to appreciate at an approximately commensurable rate.

Source: The ultimate investing hack: dividend growth stocks by Jen Nurick, Josh Veltman at DivGro via FirstLinks

The above-linked article is worth a read.

Investors interested in dividend growth stocks can use the examples of P&G and Lowe’s Companies to identify additional potential candidates for investment.

Disclosure: No positions