Dividend Growth strategy question

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Hey guys, I’m scratching my head a bit on the whole dividend growth mindset. If I take a couple examples like CCL.B.TO or MFC.TO or BMO.TO or even POW.TO which I own a good position in, the share price hasn’t done a whole lot over the last 3 years or so. In some cases the dividend is decent (meaning above 5% in my mind) but like CCL its sub 2%.
I can’t seem to reconcile in my mind buying a stock that doesn’t grow much and also doesn’t pay me much to wait. You seem to focus a lot on how much the dividend is growing over time, but 5% growth on a 1.5% dividend doesn’t add up to much.
I guess I feel like I’m missing something. For me the stock either has to grow more than 5% per year or pay me 5% or more per year to be worthwhile.
Thanks in advance. Loving the content on StockTrades!

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Asked on September 2, 2020 7:17 am
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Private answer

Hi there,

To honest, there is no easy answer here. It is all dependent on your investment profile. Typically, there are three types of investors - value, income and growth. There are also different variations of these. Naturally, all three have very different characteristics. For example, some that employ a dividend growth strategy may not care about share price appreciation - their sole focus is on income (and growing said income). You see this a lot as investors near retirement and rely on dividend income to support their lifestyle. They look for safe and reliable dividends first - capital appreciation is second.

There is also no perfect formula. A stock with a high yield and low growth rate may be more appealing to some as income today is their first priority. Some may prefer a lower yield with a higher dividend growth rate - typically a high dividend growth rate is a sign of higher growth. In this case, your likely to get both income + capital appreciation.

Each individual investors has their own set of goals (at least they should!). If you are more concerned on generating income today, then I can see how a 1.5% yield growing at 5% may not be attractive. However, the company maybe be forgoing dividend growth because it is investing in growth opportunities. So the company finds it a better us of cash to grow the company. This likely means the company thinks it can return more in capital appreciation.

Bottom line, it is important for investors to have a plan. As an example, i have two portfolios (a pure growth and a dividend growth). In my dividend growth portfolio, the lower the yield, the higher the dividend growth rate. If the yield is higher, I am ok with having a lower dividend growth rate.

Hope this makes sense. Happy to discuss further.

Mat

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Posted by Mathieu Litalien
Answered on September 2, 2020 12:04 pm