TL;DR: Dividend growth investing means investing in companies that have raised their dividend for years, with an eye on an affordable payout (the payout ratio) and healthy earnings. You can reinvest dividends. A dividend is not guaranteed and the price can fall.
What can you expect?
- Time per week
- About 1 hour a week, plus extra time around annual results.
- Starting capital
- No fixed minimum. With small amounts, order costs weigh heavily and spreading across many shares is difficult. Only invest money you can afford to lose.
- Typical setbacks
- Cut or scrapped dividends, price falls of 30% or more in a weak market and years in which dividend shares lag the market.
- Costs
- Order costs (also when reinvesting), spread, currency costs on foreign shares, custody fees and withholding tax on dividends. Compare the costs of several brokers.
- Not suitable if…
- People who expect a guaranteed income, need the money in the short term or cannot bear a price fall.
How it works
In dividend growth investing you choose companies that have been raising their dividend for a long time. The idea is that a company paying more year after year probably earns stable profits. That is no certainty: a dividend is never guaranteed and can be cut or scrapped, for example in a recession. The share price can also fall sharply. You can reinvest the payouts, but that does not remove the risk. There are lists of companies with a long run of increases, such as the 'Dividend Aristocrats' (S&P 500 companies with at least 25 years of increases). A list is not a judgement on the future.
Core principles
- 1. Look at companies with a long run of dividend increases
- 2. Check whether the dividend is affordable (payout ratio and free cash flow)
- 3. A high dividend yield can be a warning sign
- 4. Spread across several companies and sectors
Step-by- step plan
- 1
Build a candidate list
Start with a list of companies that have been raising their dividend for years, for example via the Dividend Aristocrats or your own screener. For each company, note: dividend yield, five-year dividend growth, payout ratio and valuation.
- 2
Check whether the dividend is affordable
Look at the payout ratio (based on earnings) and at coverage from free cash flow. A high yield is a reason to check more closely, not a reason to buy.
- 3
Assess dividend growth
Calculate average annual dividend growth over five and ten years. Compare it with earnings growth and with inflation. A dividend that grows faster than earnings cannot keep rising.
- 4
Decide how you reinvest
Choose whether the dividend is paid to your account or reinvested. Not every broker offers automatic reinvestment. Reinvesting manually costs order fees, so compare them before reinvesting small amounts.
- 5
Check regularly and rebalance
Review your positions when companies publish results. Was the dividend raised? Is the payout ratio still healthy? Rebalance when one position grows too large.
In detail
How dividend growth works
A company pays out part of its profit as dividend. If it raises that amount every year, the income from your position grows, even if you buy no more shares. If you use the payout to buy extra shares (reinvesting), you receive dividends on those too.
Growth is never certain. A company can cut or scrap its dividend, for example in a recession. The worked example below shows with made-up figures how the payout can grow if the dividend does rise every year.
Lists of dividend growers
There are lists of companies with a long run of increases. The best known are the 'Dividend Aristocrats': S&P 500 companies that have raised their dividend for at least 25 years in a row. Such a list is a starting point for finding candidates, not advice and not a guarantee. Companies can drop off the list.
For European investors, dividend policy differs by country. Many European companies pay out in a different way and less often with a long fixed run of increases.
The payout ratio
The payout ratio is the dividend divided by earnings per share. If a company pays a €1.20 dividend on earnings of €2.00 per share, the ratio is 60%. A low ratio leaves room for increases or setbacks. With a high ratio (certainly above 80% or 90%), a small fall in earnings can already lead to a cut.
Also look at free cash flow and the trend over several years. A rising ratio can mean earnings are lagging.
High yields and other pitfalls
A dividend yield is the dividend divided by the price. If the price falls, the yield rises automatically. A very high yield can therefore mean the market expects a cut. So look at the cause before you see a high yield as an opportunity.
Also allow for costs and tax: withholding tax on foreign dividends, currency costs and order costs when reinvesting. For tax treatment, see belastingdienst.nl.
- A horizon of several years
- Basic knowledge of annual figures
- Understanding of the difference between dividend and price
- Screener or list of dividend growers
- Annual reports and cash flow statements
- Spreadsheet to track dividends
- 01 Several years in a row of a higher dividend
- 02 Payout ratio (dividend divided by earnings) not too high, for example below about 60%
- 03 Dividend covered by free cash flow
- 04 A healthy balance sheet and earnings that are not falling
- 05 A valuation you can justify yourself
- 01 Review the position on a dividend cut or suspension
- 02 Review when the payout ratio gets too high (for example above about 80%)
- 03 Review if earnings fall structurally
- 04 Rebalance when one position grows too large
Worked example
Made-up worked example (not a forecast). You buy €10,000 of shares with a dividend yield of 3%. In year 1 the dividend is therefore €300. Assume the dividend rises 6% a year, the price stays flat and you do not reinvest the dividend. We leave out tax and costs.
Formula: dividend in year n = €300 × 1.06^(n−1).
| Year | Dividend |
|---|---|
| 1 | €300.00 |
| 2 | €318.00 |
| 3 | €337.08 |
| 4 | €357.30 |
| 5 | €378.74 |
- Total over 5 years: €1,691.13
- Year 5 dividend relative to what you invested: €378.74 / €10,000 = 3.79%
- Year 10 dividend (same assumption): €300 × 1.06^9 = €506.84
Payout ratio: if the company pays a €1.20 dividend on €2.00 earnings per share, the ratio is €1.20 / €2.00 = 60%. At a €1.80 dividend it is €1.80 / €2.00 = 90%: there is little room if earnings disappoint.
This assumes a dividend that grows every year. In reality the dividend can be cut or scrapped and the price can fall. Withholding tax, currency costs and order costs reduce what you keep.
Hypothetical example, not advice.
Work it out yourself
Risks and risk management
- A dividend is not guaranteed: it can be cut or scrapped
- The price can fall sharply, even if the dividend stays
- A high yield is often a sign the market expects a cut
- Concentration in a few sectors (for example financials or energy)
- Withholding tax on foreign dividends and currency risk reduce what you keep
- Costs per reinvestment can weigh heavily on small amounts
- Inflation can erode the purchasing power of the dividend
Learn the basics
Key takeaways
- In this approach, dividend growth matters, not just the level. A high yield is not a quality mark.
- The payout ratio shows whether the dividend is affordable. A high ratio leaves little room if earnings disappoint.
- A long run of increases says something about the past. The dividend can still be cut.
- Reinvesting dividends makes your holding grow, but also raises your exposure to the same share. Watch diversification.
Frequently asked questions
Are there European companies with a rising dividend? +
Yes, but the runs in Europe are often shorter and less fixed than for the American Dividend Aristocrats. Dividends here are more often cut in bad years. This is not advice on any particular company. Check each company's dividend history, payout ratio and cash flow.
How high should the dividend yield be? +
There is no fixed limit. A very high yield can mean the market expects a cut. A low yield with fast growth can also fit this approach. Look mainly at whether the dividend is affordable and at the overall picture of the company.
What do I do if a company cuts its dividend? +
Then the premise of your choice no longer holds. First find the reason: a temporary setback or a structural problem? Then review your position based on your own rules. Set an alert via your broker or a news source so you notice quickly.
Origin
General technique