Choosing whether to invest in stocks that offer steady income or long term growth is a subject that usually divides investors – but an increasing number think that you can have both.
At the heart of this apparent crossing of investing wires is a dividend strategy that combines a conventional focus on dividend yield with a strong emphasis on a company's ability to grow its payouts over time. Find a company that can do that, the argument goes, and you'll find a company with a rising share price too.
While investment headlines tend to be dominated by the market's high-growth stock successes, analysts claim that since 2000, sparkling individual stock performances have really just been exceptions in otherwise unremarkable market conditions. For the FTSE, like the S&P in the US, the 2000-2003 crash marked the start of a secular bear market that is still running. In over ten years there have been short periods of elation but for the most part the trend has been sideways and the performance has been negative. In terms of overall capital growth it was a lost decade. Ominously, some commentators think there could be a lot more of this so-so performance to come.
One of the consequences of these conditions is that the hitherto unsexy world of dividends has got a hell of a lot more alluring for many investors. Low interest rates, uninspiring bond yields and stalled equities have given yielding stocks a magnetic attraction. My colleague Ed has been discussing this, together with the contents of a recent SocGen note in which the bank's analysts have formulated an index of so-called Quality Income stocks that they believe offer safety and an inflation-busting yield. That index has outstripped all manner of yields, bonds and equities since 2000. However, as the analysts concede and critics would stress, that performance is no guide to the future.
It is that uncertainty over the future that has contributed to a surge in interest in dividend growth strategies. Dividend Growth Investing involves buying stocks that are committed to growing their dividends over time – and have a track record for doing just that. Rather than selecting shares with spectacularly high yields, the strategy takes a longer term view and incorporates the advantages of compounding through reinvesting dividends to meet its objectives. For investors that have an eye on retirement or meeting future financial requirements, Dividend…
