By James Woolley
There are some investors who are only interested in capital gains. However there are lots of others who like to invest in shares that will give them a solid regular income in the form of dividends. There are many dividend strategies you can use, but today I want to discuss a very simple, but effective strategy you can use.
Basically it involves using some kind of stock screener to find those companies that have long and established records of dividend growth. The reasoning being that if they have constantly grown their dividends every single year, even in adverse market conditions, then they are likely to continue growing their dividends by a similar amount in future years as well.
You can vary the length of time and the amount of growth that you require, but a good rule of thumb is to look for dividend growth of at least 10% over this period of time. So you could look at companies that have grown their dividends by this amount every year for the last 10 years, for example, or you could drop down to the last 4 or 5 years if you want to find a few more companies.
The thing is that this is a good indication of a strong company, and it shows that they are able to withstand challenging market conditions. For example we all know that 2008 and 2009 were very tough years for many businesses, so those that still managed to grow their earnings and their dividends during these years are clearly very good well-run companies. Furthermore they should do even better during the good years.
It’s not a foolproof strategy by any means because a strong history is not necessarily an indication that a company will do just as well in the future. There may be new businesses starting up in the future who could eat into their market share, their products may fall out of fashion, or they may have some kind of crisis that negatively affects the company. However if you pick the very best companies from this shortlist and look at future analyst forecasts for the next few years, you should get a good idea of which ones are likely to continue growing.
The point is that you if are investing for income purposes, you need to find those that have secure dividend payouts, and ideally those that are likely to increase their payouts every year. A long and established history of this kind of growth is always a good thing, and the longer the better. It is no guarantee of course, but it is as good a guide as any other and a pretty good strategy overall.
About the Author
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