What is Dividend Growth Investing (DGI)?

A green line graph superimposed on a bar chart and both are trending upwards

Written by Robert Hodges

Published on October 27, 2019

Dividend Growth Investing (DGI) is a form of investing in which you only buy stocks which have raised their dividend year after year, without fail, for at least the last 5-years in a row. In many cases the companies have raised their dividends for the last 10, 25, even 50 years in a row, or more. This group of stocks include many well-known names such as McDonald’s, Microsoft, Proctor and Gamble, and AT&T.

The purpose of a well-constructed DGI portfolio is to produce a dividend income stream which is safe, reliable, and ever-increasing. Year after year you can expect to collect more dividends than the year before. Therefore, the DGI investor focuses on the dividend characteristics of their companies (dividend yield, dividend growth, consecutive years of increase, etc.), rather than the stock price. They know that as long as the dividends paid by a company keep increasing year after year, then the stock price will eventually follow. This frees the investor from having to follow, and worry about, drops in the price of the stock. Instead they follow the dividend growth. If the dividend keeps growing, any decrease in price will not last for long.

Over the long-term (20 years or more) DGI has been shown to be the investing philosophy which has outperformed all other types of investing. As the following graph from Ned Davis research shows, DGI stocks (i.e. “Dividend Growers & Initiators”) have significantly outperformed all other types of stocks.

But buying quality dividend growth stocks at good valuations is not all it takes to unlock the full power of DGI. In order to achieve the best long-term returns, the dividends must be reinvested back into the portfolio and be used to buy even more shares of stocks. These new shares, in turn, produce even more dividends, which then buy even more stock, which produce even more dividends, and so on. This is called compounding. And when you combine the compounding of the reinvested dividends with the compounding of the dividend growth you get a powerful multiplication effect which supercharges your total return.

This can be demonstrated in the following graph which shows the power of reinvestment over time. Portfolio which reinvested the dividends grew to be about 5 times as large as those that did not.

This is the basic philosophy of DGI:

  • Buy dividend growth stocks; stock which raise their dividend year after year.
  • Buy them when they are undervalued.
  • Reinvest the dividends back into the portfolio to buy even more stock.
  • Hold the stocks for the long term.

And that’s it.  Simple!  Which is another reason it is so effective.

Obviously, there are more details involved, but this summarizes very well what a DGI investor does.  And it demonstrates one of the most powerful aspects of DGI.  Its simplicity.  Anybody can understand it, anybody can do it, and anybody can be successful with it.

At PTI we manage several different portfolios using the DGI philosophy.  In the free part of the website you can follow some established portfolios which were built using DGI, including the KISS portfolio and the Retirement portfolio.  If you choose to subscribe to the newsletter you will be able to follow along as we create a brand new portfolio, the PTI Portfolio, which we will build one stock at a time, showing the process, the reasoning, all the transactions we make, and the results.

A subscription to The PTI Newsletter is only $4.99 per month, or $44.99 for a full year.  We also recommend buying the book, which goes into more detail about DGI, and shows how several different portfolios can be built.  The book is available in kindle form on Amazon for $9.95, and from the PTI website in PDF form for the same price.  You could also bundle the yearly subscription and the book for $49.95.

DGI allows anybody to manage their own portfolio, which explains another reason it performs well.  You don’t have to pay anybody to manage your portfolio.  Over the long-term this can save you thousands of dollars in fees.  It is also fun, very rewarding to watch your income and portfolio value increase over time, and since it doesn’t take much time to execute, it gives you the freedom to enjoy all the other things you want to do in life.  Nothing could be better than security your financial future while at the same time enjoying your life.

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