When I first started learning about stocks I was drawn towards investing in companies that pay dividends. As I researched more about dividend stocks I wondered why anyone would invest in a stock that paid a lower dividend yield than their competitor. I clearly did not understand dividend yield vs. dividend growth.
High Dividend Yield
I began identifying high dividend yield stocks and even gravitated towards the Dogs of the TSX approach to investing. This is where you purchase the 10 stocks in the S&P/TSX 60 with the highest dividend yield, hold them for a year, and then replace them with the new list of 10 high yielding stocks.
High Dividend Growth
So if high yield alone is not a good enough measure to determine which dividend stocks to own, what else can investors look at? Dividend growth investors are looking for stocks that can consistently raise their dividends over time. There are a few ways that investors can use to determine the best dividend growth stock.
It’s important for dividend investors to remember that the search for yield does not simply mean chasing the highest yield in the market. Often times there are warning signs that accompany stocks with high yields and unsustainable dividend payout ratios.