The Difference Between Dividend Growth and Dividend Income Investors

Perhaps the best way to explain the difference In Dividend Income Investing and Dividend Growth Investing is by an example.

Dividend Growth vs Dividend Income


What is the difference between Dividend Income Investing (DII) and Dividend Growth Investing (DGI)?

Dividend Growth Investing is based on the premise of Investing in good solid companies that steadily increase their dividends each year. Most companies that are preferred are call “Dividend Aristocrats or “Dividend Champions” and would have a reliable history of increasing its dividends each year for the last 25 years but may include more recent companies with streaks as few as 5 years. Historically these companies have what I consider to be Low yields (anything below 5% for my purposes). Whereas Dividend Income Investing looks for High Yields, certainly over 5% and hopefully averaging 9 -11% in their yields.

Perhaps the best way to explain the difference In Dividend Income Investing and Dividend Growth Investing is by an example.

Let’s look at an example of Dividend Income Investing (DII) versus that of Dividend Growth Investing (DGI):

Two Investors – Both have portfolios worth exactly $500,000 dollars. Investor A is a Dividend Growth Investor (DGI) and Investor B is a Dividend Income Investor (DII)  We will assume

Investor A’s portfolio averages 2.5% in Dividend Yields (Compounded Quarterly) and has a Dividend Growth Rate (DGR) of 5% annually ( The Dividend grows 5% each year)

1st Year returns = $12, 617.68

2nd Year returns =$13,589.25

3rd Year returns=$14,652.83

4th Year returns=$15,822.07

5th year returns=$17,108.43

10th Year returns =$25,883.44

20th Year returns= $68,970.59

Impressive by any means. Because the dividends were reinvested the portfolio has grown to $1,066,661.75 and produces a cool $68.970.59 in Income each year. That is $5,747.54 per month. Most of us would love that much of guaranteed income each month for retirement.

Now let’s compare that to the Dividend Income Investors portfolio.

Investor B’s portfolio averages 10% in Dividend Yields (Compounded Quarterly) and has a Dividend Growth Rate of 0% annually ( The Dividend does not Increase).

1st Year Returns = $41,216.08

2nd Year returns =$44,613.61

3rd Year returns = $48,291.21

4th Year returns =$52,295.96

5th Year returns= $56,606.83

10th Year returns = $84,114.77

20th Year returns = $185,728.98

The portfolio has grown to a whopping $2,253,110.24 dollars and produces $185,728.98 per year in income or $15,477.41 per month. More than two and a half times that of the Dividend Growth portfolio.

In the first year alone, actually by the 4th month, The Higher yield of the Dividend Income Investor has provided more income than that of the dividend growth investor. By the end of the first year the Dividend income investor has over $40,000 dollars compared to the over $12,000 for the Growth investor. Now of course we do not let those earnings sit in the account because we want our income to start earning money for us as soon as possible. This would be true for both styles of investing but let’s say we are dripping our dividends back into our investments. Since the higher yield account of the dividend income investor is producing income at 3 times that of the lowering yielding then the account of the dividend income investor is investing more than 3 times faster and therefore incurs more than 3 times more compounding action.

Of course eventually the the lower yield and higher dividend growth rate would catch up and exceed that of the Dividend Income Stocks since they usually have a higher growth rate but it could take as long as another  fifteen  to twenty   years to play out so unless your horizon is longer then you are better off as a Dividend Income Investor.

Yes it is exciting to watch your dividends grow steadily each year but the truth is – Many higher yielding stocks Do Increase their Dividends periodically as well ! And I am a “Bird in the Hand” kind of guy. I like my money up front.

For me, this is why I am a Dividend Income Investor. Many will say that a 8% yield is too risky or not realistic. Well, I am actually earning closer to 10% in two of my portfolios and other one earns 7% on average. So yes it is realistic because I have lived it. As for risk, I would argue that I have not seen any more volatility or risk in the three years that I have been investing in higher yielding stocks, but certainly there is some risk. This is why I always encourage everyone to limit any potential losses by practicing Risk Mitigation in your portfolios.

Dividend Income investing is also a great way to boost your income when you do retire. If you were a Dividend Growth Investor you can switch some of your lower yielding stocks for higher yielding ones (or even keep half and switch the other half of the shares for higher yielding) for an instant boost in income.

Using the example above lets say you have just retired and are earning the $68,970 per year in income. By selling half of the shares and investing in higher yielding stocks you can increase your income. Or for the more conservative folks even just doing a few shares of select stocks could boost your income say – 2% – which would help promote portfolio growth and keep up with inflation. Being conservative is fine but being too conservative can actually harm you financially.

Any thoughts or comments? We would love to hear them !


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