Growing Dividends is the Secret to Wealth

For the dividend-focused investor, nothing is better than one of your stocks announcing a dividend increase. So you can be assured that this Seeking Alpha headline caught my eye: 100 REIT Dividend Hikes.

Investing for dividend growth is a sure-fire way to build your wealth over the long term. The article explained that 100 real estate investment trusts (REITs) had increased their dividend rates so far in 2022. Last year there were 120 rate increases in the REIT sector.

This many increases bodes very well for one of my favorite investment strategies…

REITs own commercial properties or invest in real estate-related debt securities. The Nareit includes 213 publicly-traded REITs in its All REITs Index. These companies operate as pass-through businesses, which means they don’t pay corporate income taxes as long as they pay out at least 90% of net income as dividends to investors. The REIT dividend rules make the sector a good place to look for attractive dividend-paying stocks.

A few years ago, I researched the returns from growing dividend stocks. I found that investors earn an average annual compound total return that, over the long term, will be very close to the average dividend yield plus the average dividend growth rate.

For example, if an REIT (or shares of any stock with growing dividends) has an average yield of 4% and the dividends grew by an average of 10%, investors in that stock will have seen a 14% compound annual total return.

While the shorter-term market cycles will pull returns above and below the expected results, owning a dividend growth stock for ten years or more will push the returns very close to mathematical expectations.

When researching dividend growth stocks, look first at the historical dividend growth rate. You want to see the average growth rate and how many years the company has been increasing its dividend. For example, industrial property REIT Prologis, Inc. (PLD) has increased its dividend for eight consecutive years with an average of 10.5% dividend growth. Add in the current 2.5% yield, and you have a low-teens return potential. Continue reading "Growing Dividends is the Secret to Wealth"