To counter today’s rock-bottom yields, investors must be choosier about the companies they are willing to purchase. That’s where a record of regular dividend increases can make such a difference.
High yields can simply be a signal that a company’s weakness has driven its price down faster than management has been able to reduce its dividend. More than ever, investors must focus on a company’s ability to increase dividends going forward.
Today there are 237 companies in the Nasdaq U.S. Broad Dividend Achievers Index (formerly Mergent’s list of U.S. dividend achievers), which is a good place to start looking for companies focused on increasing dividends every year.
A record of regular dividend increases is both a sign of company strength and of the commitment of management to return value to shareholders. Both are essential for the successful dividend investor.
I’m recommending you purchase Vanguard Dividend Growth Fund Investor Shares (MUTF:VDIGX). Vanguard Dividend Growth is one of the few actively managed funds I still recommend, and VDIGX’s mandate is to focus on companies that have “the ability and commitment to grow their dividends over time.”
Vanguard Dividend Growth Fund manager Don Kilbride has made it clear that he’s more interested in investing in companies that will increase their dividends than in companies that simply have a high yield. Kilbride told the New York Times that he’s not specifically looking for companies with high yields today but instead is looking at companies with a commitment to a high payout ratio.
Today, the Vanguard Dividend Growth Fund yields 2.03% and includes some of my favorite dividend achievers in its top 10. Companies like The Coca-Cola Co (NYSE:KO), Praxair, Inc. (NYSE:PX), Lockheed Martin Corporation (NYSE:LMT), Johnson & Johnson (NYSE:JNJ) and United Technologies Corporation (NYSE:UTX) are ranked among them.
On average, this group of five had a 10-year dividend growth rate of 15.32% at the end of August 2014. That strong record of dividend increases is exactly what you should be looking for as an investor interested in a continuous stream of income for you and your family to live on during retirement.
Until you retire, your steady dividend stream will be used to purchase more shares, locking in your best friend in investing, compound interest. According to market lore, Albert Einstein once called compound interest the “eighth wonder of the world.”
Employ the miracle of compound interest at every opportunity. Invest in Vanguard Dividend Growth today.
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