Dividend Growth Investing, also known as ‘DGI’ for short, is an investing strategy focused on stocks and shares. Dividend Growth Investors invest in individual company shares, and use a personalized screening method to pick stocks with specific dividend characteristics.
Dividend growth investing is popular across finance and investing blogs in the UK and worldwide. It seems to be tapping into enthusiasm in a way not seen by traditional buy and hold investing styles.
Let’s be clear, if you find a financial adviser – they are not likely to recommend this approach as a holistic way to invest.
But what is special about DGI, and can we learn anything from its growing popularity?
Introduction to Dividend Growth Investing
DGI investors exclude many stocks from investment by using a stock screening system. The exact criteria will vary for each investor, who will tweak based on their own personal preferences. An example of a DGI screening criteria list is below:
- Does the company pay dividends?
- Has the company maintained regular dividend payments over the last decade without breaks?
- Has the company increased their dividend each year for the last five years?
- Does the company have a market capitalisation (total value) of $100m or greater, and trading volumes exceeding 100,000 per day?
As mentioned above, this is only an example screening criteria. Depending on how many (or how few) stocks pass this test, a DGI investor may adjust the criteria to be tougher (or easier) to pass. This will produce a list of trading ideas which is small enough for the investor to research.
Also Read: How to Use Zerodha Margin Calculator?
Why is Dividend Growth Investing Popular?
Dividend growth investing is really popular for several reasons:
- It focuses on passive income. DGI investors count their dividend pennies with an extreme level of dedication. Being able to count income that you earned while sleeping and literally doing nothing is very exciting.
If you’ve ever felt like you are living to work, rather than working to live, you may find it refreshing to be able to build a separate source of income which is completely independent from your salary.
Passive income is linked to other concepts such as retiring early and building wealth, and therefore it’s very tightly linked to a sense of financial independence and aspiration.
It’s no surprise, therefore, that followers of DGI investing espouse its wonders. It’s not necessarily the technical investing theory which is capturing their attention – it’s the excitement of investing itself.
- Dividend growth investing can reduce stress. When investors obsess over the latest valuation of their stockbroker account, it can cause distress to see this number slip into the red.
DGI investors are in the enviable position of being protected from this eventuality. Of course their equities can also make losses – but they aren’t focusing on market value. Their mindset, i.e. their definition of success, is different. Therefore they aren’t as bothered during market crashes.
To the contrary – Dividend growth investors are more inclined to view a slump as a buying opportunity. Dividends do also tend to get cut during recessions, but DGI investors still see this as a cheap entry point to get some stellar dividends in a few years time. Dividend cuts also tend to be less severe than the fall in stock prices.
Therefore DGI investors are focusing on the positives of the slump, rather than licking their wounds from the short term paper losses.
Overall, regardless of whether dividend growth investing is a technically superior strategy, we can learn much from its popularity. It’s popular because it makes investors feel good. It not only excites them about the prospect of building a passive income, but it also shields them from the disappointment of a market crash.