The only regular income we have is my monthly Social Security direct deposit. That isn’t enough to make it possible to buy any new investments, but Social Security does cover groceries, utilities, property taxes and gasoline. It doesn’t take long for the money to be used each month. However, there is a source of dollars that flows into our accounts on a monthly basis. The source is investment dividends from various stocks and ETFs like VYM and SCHD. The dividends fund charitable and family gifts, travel, home improvements, and investing opportunities.

But – Don’t Get Terminated

Recent AAII articles have highlighted some aspects of dividend investing. One of them talked the annualized return of stocks where the dividend is cut as opposed to those where the dividend increased. The contrast is worth noting and it is the reason why I generally sell a stock if the dividend is cut. Because you never can really know which company might cut/reduce their dividend, diversification is important. Losing a dividend is like a pay cut or getting terminated from your job.

Dividend Cuts versus Dividend Growth

Charles Rotblut (AAII) discussed the problems some companies face and what the company usually has to do to stay solvent. He said, “Should those problems result in the dividend being cut, the return suffers. Ned Davis Research calculated that shares of dividend cutters realized a 4.6% annualized return from June 1994 through February 2016 compared to a 12.4% annualized return for stocks where the dividend was raised (“Investment Strategies for Non-Dividend Payers,” March 2016). Eliminating the dividend is even worse, with such stocks incurring a –0.9% return. Figure 2 shows the return differential between stocks with rising dividends and those with flat or cut/suspended dividends.” – Analyzing a Stock by Its Dividend and Shareholder Yield, by Charles Rotblut. I am including Figure 2 so that you can see the comparisons. (AAII is the American Association of Individual Investors.)

As you can see, growing dividends have a considerable impact on returns. Cutting or eliminating dividends can be a warning to move on to something better. Like almost everything else in life, there are exceptions.

I like to “Grow Dividends” so that is my investing strategy.

Link to AAII article (for AAII subscribers): AAII

Avoiding the Cutters

One of my investing goals, therefore, is to avoid companies that might have to reduce or eliminate their dividend. While I don’t dismiss a stock from consideration just because the company doesn’t pay a dividend or increase their dividend, I like to have a high percentage of my investments in stocks and ETFs with growing dividends.

Biggest Rising Dividend Payers

Another good AAII article I read was written by Derek Hageman. Mr. Hageman has this to say: “Dividend-paying stocks can satisfy investors’ need for current income and capital growth, especially during volatile markets. One area of consideration is for investors to turn to the greater stability of rising dividend-paying stocks. While much remains uncertain, the highest-quality companies have proven their ability to grow their dividends over time, demonstrating an ability to survive through a range of market environments.”

Dividends Tell a Story

I also agree with this observation from his article: “Dividends are a straightforward and effective tool to identify high-quality, well-run companies. Dividends have the potential to increase corporate accountability and can signal management’s confidence in current and future growth prospects.”

It is possible to grow your income in retirement

The image included with this blog post is from Mr. Hageman’s article with some notes to show the stocks in our portfolio. He used a universe of stocks with a share price above $3 and he eliminated financials to provide a view that included more sectors. He did include insurance companies but excluded foreign stocks. Finally, he set a filter requiring annual dividend increases over the last five year. “The five-year historical dividend growth rates provide a sense of dividend sustainability.” Of course, it makes sense that he wanted to see positive current earnings for the current fiscal year.

Full Disclosure

The stocks in his illustration that we own are NTAP, TXN, ADP, ITW and KR. As you can see, these are all in different sectors. I also believe they are businesses likely to face less harm from Covid-19.