Is it worth chasing dividend growth?

As a dividend growth investor, I’m focussed on a dividend stream that has the potential to experience strong growth for the next few decades. But there’s no such thing as a universal dividend growth rate across all companies. Do marginal differences in dividend growth rates really make much difference to your dividend income and is it worth trying to get higher dividend growth? 

 

I recall reading that the average dividend growth rate for companies in the S&P 500 is approximately 5-6% (averaged over a long period of time). This is not at all bad, certainly handily beating current rates of inflation, and leading to real growth in dividend income year over year.

Practically speaking, this would mean that your initial $100 becomes $106 in Yr 2 , $112 in Yr 3 and so on. You can see that this dividend stream soon starts to add up over time, and that’s just at 6% dividend growth

So just how much difference does incremental dividend growth make to a dividend portfolio? To illustrate this, let’s take a look at an example.

The table below shows the effect of $ 10,000 invested in a dividend stock which is earning an initial yield of 5% . We illustrate dividend growth rates of 5%, 10% and 15% below. You can see the difference that the  growth makes on the annual dividend received after 5 years, 10 years and 20 years respectively

Annual Dividend 

Growth	Year 1	Year 6	Year 11	Year 21
5%	$500	$638	$814	$1,327
10%	$500	$805	$1,297	$3,364
15%	$500	$1,006	$2,023	$8,183

 

While the difference in the amount of the annual dividend isn’t that great in the first few years, it really makes an impact at the 10 year stage.

The investor that has been experiencing a 15% pa dividend growth over 10 years is receiving an extra $1000 per year  in Yr 11 compared to the investor whose dividend has been growing at just 5%.  After 20 years, thats almost a $7,000 difference per year!

Even a 10% dividend growth versus a 5% growth makes almost a $2000 difference in the 20th year in terms of the amount of dividend received.

And to this point, we have only been talking  ”in year” dividends.

Lets look at the cumulative impact of the dividends paid across a 20 year period for each of the different annual growth rates. The table below shows the aggregate amount of dividends that the investor  would have received in total after  5 yrs, 10 yrs and 20 yrs respectively.

 Cumulative Dividend

Growth	Year 1	Year 6	Year 11	Year 21
5%	$500	$3,401	$7,103	$17,860
10%	$500	$3,858	$9,266	$32,001
15%	$500	$4,377	$12,175	$59,405

 

You can really see the impact after Year 20 of the difference of the impact of dividend growth on dividends you would have received over time.

If you had been able to grow your dividends at a rate of 10% p.a versus 5%p.a you would have been more than $14,000 better off in total after 20 years. And at the 15% growth rate? Compared to the 5%, that’s more than a $40k difference in dividend payments over this time. More than 4 times your initial $10,000 invested.

The thing these numbers don’t take into account is the impact of additional investments during the period.  Over 20 years, you would have many opportunities to make additional contributions and reinvest your dividends. Your initial $10k investment could be more like $40k or $50k  in terms of what you would have contributed into the portfolio over 20 years.

So that difference in the annual growth in your dividends between 15% and 5% starts to hurt in terms of missed dividend income. A lot.

 

So what’s the takeaway?

I’m not suggesting that anyone’s aim should be to try and attain a 15% growth in dividends over a 20 year period. Given S&P dividend growth of 6% over an extended period, thats not realistic. What I am suggesting is to be alert to opportunities to increase your overall dividend portfolio growth rate. In my case, that means looking to source some of my dividend income from mid caps and small caps whose dividends are increasing at greater than 10% p.a. It means taking a hard look at some of the underperformers in your dividend portfolio whose best days of dividend growth may be behind them.

 

Doing these few things could make a difference to your dividend income over a long period of time. A BIG difference.