If you’re looking to grow your wealth over time and generate some passive income along the way, you might be interested in exploring growth dividend stocks. This approach combines the potential for capital appreciation with regular dividend payouts.
With growth dividend stocks, you’re not only getting consistent cash flow but also have a chance to see your investment increase in value. This means you can benefit from both dividend increases and the power of compounding.
Table of Contents:
- What is Growth Dividend Stock?
- Factors to Consider when Choosing Growth Dividend Stocks
- Benefits of Investing in Growth Dividend Stock
- Navigating the Current Investment Climate
- Other Growth Dividend Sectors
- FAQs about growth dividend stock
- Conclusion
What is Growth Dividend Stock?
Growth dividend stock represents companies that prioritize expanding their business and sharing profits with their shareholders. These companies typically boast solid earnings growth potential and are committed to increasing their dividend payouts regularly.
Dividend Growth Investing – What You Should Know
Dividend growth investing focuses on owning companies that consistently raise their annual dividends. These companies are usually very stable, reliable businesses that can increase their earnings in various economic conditions.
You may be wondering, “How can a growth stock pay dividends?” It might seem unusual, but it is definitely possible. Think of companies like Alphabet, known primarily for its tech-focused Google search engine. In 2024, this traditionally high-growth tech giant began issuing dividends for the first time.
They announced a $0.20 per share dividend and plan to make quarterly dividend payouts going forward. In addition to dividends, they also announced a substantial stock buyback, totaling $70 billion. This is a clear sign that even growth-focused tech companies can offer investors a share of the profits as their business matures. Alphabet’s case is a prime example that can help us understand the “dividend and growth” investment strategy.
Factors to Consider when Choosing Growth Dividend Stocks
Just because a company pays dividends doesn’t automatically make it a winning investment. Evaluating various factors to determine if companies are not only consistently paying dividends but also poised for continued growth is critical to making good investment decisions.
Consistent Dividend Growth History
Check a company’s dividend history. See how long they have consistently paid out dividends and if those dividends have grown steadily over time. Companies with a strong history of consistent dividend growth are more likely to continue doing so.
Sustainable Payout Ratio
A company’s dividend payout ratio represents the proportion of their earnings distributed as dividends. This is a critical metric to assess sustainability. If the ratio is too high (over 75%), it could signal difficulty sustaining those payouts if earnings fluctuate. Seek companies with reasonable payout ratios, as they typically have more financial flexibility.
Solid Financial Health and Profitability
Evaluate a company’s financial strength by looking at their earnings growth, profitability margins, and overall debt levels. Companies with strong financial health and profitability are likely in a much better position to weather economic challenges.
These companies also tend to offer better and more reliable dividend growth over the long term. This makes it easier to calculate your annual dividend with more certainty.
Competitive Advantage and Market Position
Strong businesses with unique qualities that allow them to stay ahead of the competition for extended periods are what you are looking for with dividend growth investing. Businesses in well-established market positions can be ideal investments, as their profits are generally more predictable and reliable.
You should research the company’s history of consecutive annual dividend increases. A consistent track record indicates a commitment to returning value to shareholders.
Benefits of Investing in Growth Dividend Stock
This investment approach has the potential for significant long-term benefits that make them appealing to a variety of investors. For the new investor curious to begin investing, dividends offer a fantastic way to begin generating some passive income while you build your portfolio.
The good growth and dividend stocks found in many dividend-focused exchange-traded funds (ETFs) have the potential to increase both your income stream and your principal investment value over time. Many mutual funds also focus on this, allowing investors to access a diversified portfolio of dividend-paying stocks.
Reliable Income Stream
You can count on regular dividend payments from solid growth dividend stocks. Reinvesting those dividend payouts helps build your overall portfolio value over time.
Building a solid passive income portfolio for long-term financial security can happen more rapidly through dividend investing. Generating a high yield through dividends can supplement your income or be reinvested for even greater returns.
Potential for Capital Appreciation
Growth-focused businesses have the potential to significantly increase their earnings, which usually leads to price appreciation for the shares themselves. While value can fluctuate, holding solid companies long-term can yield substantial growth in your portfolio.
This creates more financial freedom over the years and the potential for significant capital gains.
Inflation Protection
Dividend-paying companies are known for their history of being able to weather tough market cycles, especially when those periods include high inflation. Companies that prioritize and consistently increase their dividend payouts over long periods have a built-in ability to adapt pricing based on market fluctuations, which provides solid protection against rising costs.
But that’s not the only reason dividend payouts offer this advantage. As a way to potentially offset the impact of rising prices and falling interest rates, many dividend-focused investors buy “good growth dividend stocks” because their payouts can provide a measure of income stability.
However, some people don’t like growth dividend stock. It is important to understand this perspective. Those that avoid growth dividend stock focus on a single element: maximizing share price appreciation. Investing in businesses based purely on massive anticipated share price growth means prioritizing higher return potential above any form of regular dividend payouts. Companies like Micron Technologies (MU) who, over a one-year period ending in April of 2024, saw their shares skyrocket 79% are examples of those that are solely focused on “growth stocks”.
Navigating the Current Investment Climate
Knowing the current economic and market conditions when choosing growth dividend stocks is critically important, as those conditions directly influence investment strategies and investor preferences. The best growth and dividend stocks adapt to changing market dynamics.
Adding to the mix, the Federal Reserve signaled it won’t consider interest rate cuts until inflation is cooling down toward its 2% goal. While economic conditions impact how growth-focused businesses perform, several key characteristics and sector trends provide helpful insight into the best places to focus during volatile markets. Looking for resilient businesses with a proven history of growth, high cash flow, strong competitive positioning, and robust operating models should lead investors to the best choices in the current market.
Dividend Aristocrats that Stand Out
Seeking out Dividend Aristocrats—companies that consistently grow their dividends annually for 25 consecutive years (or more.) — can be an ideal way to gain insight into market-tested options that offer consistent dividend payouts with reliable business performance, even in tougher market cycles.
| Company | 2-Yr. Dividend Growth | Market Cap | Yield | Payout Ratio |
|---|---|---|---|---|
| Amgen (AMGN) | 8.7% | $141 Billion | 3.5% | 58.5% |
| Broadcom (AVGO) | 13.1% | $356 Billion | 3.0% | 47.1% |
| Hormel Foods (HRL) | 6.1% | $28 Billion | 2.3% | 57.5% |
| PepsiCo (PEP) | 8.4% | $268 Billion | 2.5% | 68.1% |
| Zoetis (ZTS) | 15.1% | $91 Billion | 0.8% | 25.6% |
Data is as of April 25. Two-year estimated dividend growth rate estimate courtesy of Seeking Alpha.
These companies have not only delivered steady dividend growth, but have done so while creating solid share price gains over extended time frames. You’ve got a lot to gain from dividend growth stocks that could raise their payouts like these.
Other Growth Dividend Sectors
REITs
Another area that provides potentially exceptional value during periods of high inflation and rising interest rates are Real Estate Investment Trusts (REITs). By investing in properties and distributing at least 90% of their taxable income back to shareholders, REITs typically provide higher dividend yields compared to many other market sectors.
Some real estate REITs stand out as prime investment options with substantial price growth in 2024. These REITs offer a combination of growth and income, making them suitable for investors seeking both capital appreciation and dividend income.
- Extra Space Storage (EXR), whose shares jumped 30% thanks to a massive acquisition of rival Life Storage.
- Essential Properties (EPRT), with projected earnings per share set to jump by nearly 20% over the next two years.
Growth is definitely possible with these dividend stocks if the market crashes, so consider taking a closer look at these.
Energy
While considered somewhat volatile historically, the current conditions make energy a particularly appealing growth area to explore. One sector winner is Brookfield Infrastructure (BIP). Over just the past six months, the price of these shares rose over 23% and continue trending upwards as global demand for essential infrastructure steadily increases.
The key for income-focused investors is to target good growth dividend stocks within the Energy space, as these types of businesses have typically weathered turbulent market cycles effectively while continuing to issue strong payouts. Many also have built-in hedges to offset inflationary pressures. They can be considered a strategic buy as the global economy restructures and reshapes. Just look at all of these great opportunities from top dividend stocks.
If you’re like other investors, perhaps you’re not that into oil, gas, or even renewables. You might be thinking, “What are the best stocks for dividend growth” outside the energy sector? Well, read on.
One example of a high-performing growth dividend stock outside the energy or REIT sectors is Parker-Hannifin (PH). They’ve not only delivered consistent shareholder value with price increases totaling 150% over the last 10 years, but also have given back through dividends steadily and generously. As an investor, this could be considered a strong buy if it aligns with your growth and income goals. Consider also checking out these awesome companies that could offer a lifetime of passive income.
Or maybe you think, “Is it better to have growth or dividend stocks?” Maybe growth dividend stock isn’t for you because you prefer purely investing for price gains and are confident in your ability to get better returns through buying businesses that don’t distribute profits through payouts. Companies like Celsius Holdings and Apple Inc., which prioritize high share price appreciation fit this category and have delivered strong gains. They tend to make significant stock buybacks that boost earnings per share, which often translate into larger share price increases, delivering high returns on invested capital.
FAQs about growth dividend stock
What are the best stocks for dividend growth?
This varies depending on market conditions and your investment goals. However, you could start by exploring Dividend Aristocrats, companies that have steadily increased dividends for 25 consecutive years or more. Industries like Consumer Staples, Healthcare, Industrials, and REITs often include solid options.
Can a growth stock pay dividends?
This is a misconception some people have, but in reality, it is definitely possible. Although it’s less common than with established dividend-paying giants, some companies, even in high-growth technology or consumer discretionary sectors, opt to begin issuing dividends once they mature and reach substantial profitability. This means those looking for a balance between capital gains and income generation may be well-suited for a blend of both growth-oriented and established dividend-paying businesses within their investment portfolios.
How to make $1000 a month in dividends?
This hinges on multiple factors, like the size of your initial investment and the dividend yields of the companies you own. Dividend yields vary, and those numbers will shift as share prices and payout ratios change. To reach your $1000 monthly income goal, a carefully crafted diversified portfolio, including stocks with decent dividend yields, along with a large enough initial investment will likely provide you with the fastest route. Another key to increasing dividend income quickly is dividend reinvestment, as, over time, compounding creates a snowball effect that results in rapidly expanding income streams. Here are some high-yield dividend aristocrats to consider.
Is it better to have growth or dividend stocks?
This truly depends on what’s more important to you as an investor. Growth dividend stock offers the potential for consistent income plus long-term capital appreciation while “growth stocks” focus primarily on substantial share price increases. A combination approach where you carefully evaluate companies to determine whether “dividend stocks” or “growth stocks” are better can often be an effective method. Don’t be afraid to choose a blended approach, investing in businesses across multiple sectors and markets to gain both price appreciation and consistent dividend growth.
Conclusion
Growth dividend stocks present an attractive option for investors seeking both income and capital appreciation. These companies typically exhibit steady earnings and growth while rewarding investors with reliable and increasing payouts. Investors who build a strong, diversified portfolio including multiple sectors with strong fundamentals will most likely reap the rewards over time. Carefully evaluating financial metrics like dividend growth history, payout ratios, debt levels, and business models will give you the confidence needed to succeed with this approach.
Disclosure: This content is for entertainment purposes only. Please consult with an investment or wealth professional before making any financial decisions.
