What Growth Should I Expect?

We Expect Growth When There is Life

When I was a boy, we had a wooden giraffe with a ruler on its neck. Mom would check our height. The purpose was to see if we were growing. Of course, the doctor also wanted to know we were growing, and that the growth was appropriate. Even my Kindergarten report card wanted to see evidence of growth. This is one page of the report card from 1957.

Dividend Growth Progress Report and Noelle’s Question

Noelle said, “I now know how to check the progress of an ETF but I also have a question about that, but I don’t really know how to phrase it. What is a good amount of increase/decrease for the progress of your stock/ETF?”

The answer to this has at least two parts. One part is the increase in the price of the shares. I try to pick most investments for long-term growth. If in five years the investment has growth by 40-50%, then that is acceptable for my purposes. For example, the ETF VYM has grown about 47% in the last five years. The ten-year growth is even better: 147% (Seeking Alpha.) DGRO, by way of comparison, has growth about 86% in the last five years and does not yet have a ten-year history.

The second part pertains to stocks and ETFs that pay a dividend. For dividend growth I like to see an annual growth rate of 8-10%. For DGRO, the Dividend Growth Rate for five years is 10.3%. The ten-year growth rate for VYM’s dividend is 8.9%. These values are from the Seeking Alpha “Dividend Scorecard.” SCHD, another one of our ETF holdings, has a 14.55% five-year dividend growth rate. These all assume dividend reinvestment.

You never want to see a decrease over a five-year horizon. If that is happening, then perhaps you have the wrong investment.

Why Dividend Growth Matters

When you have a job or you own a business, you expect to earn more each year. During my working years at Universal Foods Corporation, Conney Safety Products, and Parts Now, I received pay increases. Part of this was due to performance but there was also a recognition that inflation was making the dollars I was paid less valuable each year. Each dollar was worth less. The $300 per month I earned in my first job out of high school was worth far more than the $300 per month I might have been paid five years later.

Investors should have the same mentality. While it is wonderful to receive a dividend yield of 5%, it is far better to own a stock with a lower yield and better dividend growth. VYM has a dividend yield of about 2.83% based on today’s prices. That won’t really keep up with inflation. If inflation is 3% (this year it is over 5%) then you should be concerned. However, my Social Security increase for 2022 is only 5.9%. That only keeps me even. I want to have dividend growth greater than the rate of inflation.

When you reinvest the dividends, the snowball grows even faster. So, growth is far more important than yield for most of our investments.

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