Canadian Focus Investors
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Why Buy Companies with
Growing Dividends?
Over the long term, the value of companies increases primarily because distributable profits grow.
Or to put it directly, Stocks prices go up because dividends go up.
It's not that complex or debatable.
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Daniel Peris
Daniel Peris, Ph.D., CFA, is a Senior Vice President and Senior Portfolio Manager at Federated Hermes in Pittsburgh, PA. He leads the Income and Value Group and is responsible for the Strategic Value Dividend suite of products. He has written several books on the subject of investing in companies that pay dividends.
Why even consider investing in individual companies that have a history of paying their shareholders growing dividends? There are many good reasons, but the primary reason is that your investments will generate significantly more dividend income, as compared to the dividend income generated by most mutual funds or exchange traded funds.
You don't need to take my word for it. The adjacent chart shows the dividend income that was generated each year, from the beginning of 2010 to the end of 2023, by my focus investing portfolio, which was invested in a small number of companies that paid significant and growing dividends.
As the chart shows, every $100 invested in my portfolio (the red line) paid significantly more cash dividends each year, as compared to $100 invested in the iShares XIU dividend ETF (the blue line), which emulates the S&P/TSX Composite Index. Additional funds were not added to either of these portfolios, after the initial $100 investment in 2010, except that all dividends were re-invested in the respective portfolios.
In addition to outperforming managed funds (including index funds) by a wide margin, there are many other advantages to investing in have a history of paying their shareholders a significant and growing dividend, as follows.
1. A Proven Strategy
The strategy of investing in companies that have a record of paying a significant and growing dividend has been proven to be effective by successful money managers including Warren Buffett, Josh Peters, Lowell Miller and Daniel Peris.
2. Simple Selection Criteria
Selecting the individual companies for your portfolio involves an examination of three variables: profitability, financial stability, and historical dividend payments, combined with an and assessment of each company's future prospects.
3. Minimal Monitoring Time
The time required to monitor the financial performance of the small number of companies in your portfolio is minimal.
4. Minimal Risk of Losses
Provided you assess the financial performance of the companies in your portfolio 2 or 3 times each year, the risk of capital
losses is minimal.
5. Maximum Dividend Income
As indicated in the foregoing chart, the dividend investing strategy described on this website can generate signficalty higher dividend income as compared to most mutual funds or exchange traded funds.
6. Unaffected by Market Gyrations:
The dividend income is not affected by stock market gyrations, including market corrections or prolonged bear markets.
7. Easy to Understand
The concept of dividend payments made to share holders is simple to understand, as compared to many other financial products available to investors. .
8. Minimal Portfolio Turnover
Provided the financial prospects of the companies in your portfolio continue to be satisfactory, it is unnecessary to replace them with other companies.
9. Inflation Protection
Dividends offer a degree of inflation production, because companies can increase their prices to keep pace with inflation so that their profits and dividends will also rise.
10. Portfolio Stability
The total value of a portfolio that contains companies that pay growing dividends is much less volatile as compared to a portfolio that contains companies that do not pay growing dividends.
11. Dividends are Hard Cash
Dividends are hard cash paid directly to each shareholder who can choose whether they want to spend it or reinvest it. You do not need to sell shares to generate cash income.
12. Reduced Risk of Fraud
The risk of accounting fraud is much lower for companies that pay dividends, because management must ensure that they have sufficient hard cash on hand to make the annual dividend payments.
13. Canadian Tax Credit
Canadian citizens who receive dividends from eligible Canadian companys receive a tax credit that that can be applied to their annual income tax.
14. Predictable Source of Income
Dividend income paid by large, established companies generally grows steadily and the payments are normally very predictable.
15. Superior Longterm Performance
Over time intervals greater than 5 years, companies that have a record of paying growing dividends have total returns (dividends plus capital gains) that exceed the total returns of companies that do not pay growing dividends.
You Can Do This
You might think that achieving outstanding investing results is only possible if you are an experienced money manager who has been educated at a prestigious business school and has dedicated their entire career to the world of finance.
This is not the case, so don't be intimidated. Warren Buffett said that most of the concepts that are taught in business schools are irrelevent to the real world of investing and some theories (such as the Modern Portfolio Theory) are worse than useless. In his view, if you want to be a successful investor, you just need to know two things:
1) How to value a business, and
2) How to take advantage of stock market fluctuations.
This website will to teach you how to do both.
1. Peris, D., 2011. The Strategic Dividend Investor. Why Slow and Steady Wins the Race. McGraw Hill, Toronto. p.17