The Dividend Growth Strategy: Should even young people bother doing it?

The following post is about the Dividend Growth Strategy: Should even young people do it? Or should they just go for index and growth stocks (more risky stocks) and then when they’re older, switch over to dividend growth stocks? 

I asked the following question on a DGI board:

Thoughts about AT&T for young investors with lot’s of time? Future returns are probably around 4-6% dividend return and 2% EPS growth. A solid investment for older investors, but one could argue that young investors should neglect AT&T and find stocks with better growth (Say Medtronic). What do you think ?

Some answers:

  • Well if someone is looking for growth stock then yes T is a sucker. I had 29 shares of T back on 9/2015. With DRIPs, I get to 32.05 shares right now with 12% growth. Not that much but the opportunity is there to make some money )
  • Just make sure, if young, not to only have a portfolio with stocks like T. own some faster growing stock like an adobe, nvidia, maybe a Facebook or amazon as well since you don’t need only income if you have time on your side
  • For young investors with lots of time, T is a mistake. They should be focused on growth stocks, which will return many times over what T will return 20 years or more in the future.
  • For any young investor with a ton of time, don’t even bother with dividend stocks and go with high risk high reward growth stocks.
  • I would put some money in T. I don’t think you should put everything in risky stocks
  • The dividend growth rate for T is too low to really appreciate the compound interest I think. I would focus on stocks with higher dividend growth rate and relatively high initial dividend yield.

My answer

Wow. I’m always astonished by the answers on this group:

Young people should focus on growth stocks (I understand it as NOT DG stocks, but growth stocks) with lot’s of risk, probably lose a ton of money, but most importantly, neglect their egde towards other investors, namely time.

Then, when you’re older, you should switch from growth to DGI stocks because somehow that’s way smarter now (now that you have lost maybe 10-20 years of compounding). Remember, I’m not talking about dividend stocks, but dividend growth stocks.

Don’t you find it insanely strange that you suggest a young person to neglect that he has lot’s of time = lot’s of compounding, but rather that he should try the classic game of finding the winner of tomorrow. Sometimes, I’m getting the sence that only a few people on this group believe (understand P*(1+i)^n) in compounding and dividend GROWTH investing.

Btw, sure we can talk growth and other stuff for portfolio management, but this group is based upon the DGI strategy, so that’s what I expect the theme to be about.

Some argue using past performance of T. Let’s avoid that since we don’t know the picture and the market is even more satured now than before. T-mobile and Verizon is also strong, and Netflix provides a threat.

The question we young investors should ask is if T is great place to add our money or if we should choose to invest in companies such as HRL or MDT. I just compared T and MDT, and given that the variables stays the same, MDT is a clear winner ((Fully aware that CAGR about 10% for 30 years is streching it, but so is it to think that AT&T will be able to grow 2% in the foreseeable future. ) Does that mean young investors should avoid T? Own both?

Well, owning both seems a bit strange since you now “know” that MDT will significantly outperform T. There’s also the argument that you don’t pay taxes on growth, but you do on dividend income. Howerer, one could argue that owning T is the same as owning a bond, or maybe a proxy-bond such as Reits.

Adding Nvidia and those non-dividend paying companies is another discussion and it’s way to complex to compare.

I do think we young investors should be aware that most of the people we chat/talk with are 10-20-30 years older, and therefore might need stocks as T and not stocks as HRL. It’s just a totally different way of thinking about time.

If young investors with time shouldn’t follow the DGI strategy, why should older people do it?

Some people start to talk about growth or index, that’s fine, but then that’s another strategy. I do save in indexes, but my main strategy is DGI. So, please tell me, what do you think? What’s the whole point about the DGI strategy if so few really believes in it? I know that I have many readers who aren’t retired. What do you think? 

13 comments

    1. Hi Tom, Glad to hear you say that. What makes me so pissed is that a lot of “older/more experienced investors” often state that, but when a young guy ask what type of asset he should be, then for no reason, they tell him to buy growth stock and risky stocks. It doesn’t make sence at all.

      1. You either understand DGI, and just envy the guy for being able to have lot’s of years with high CAGR. But switching over from that view to suddently say that one should try to find the next Netflix og Amazon since “he has so little capital that he can afford to take the risk”….

  1. At a young age it does not matter what strategy you pick. All are winners. If someone starts investing at 20 with 6,000$ per year … even with the most conservative investment i.e. Bond funds … they are are all set by 55. I am a passive investor. I am not sure about picking risky stocks ..i.e. picking a speculative pharmaceutical stock might not be a good idea at any age. However, picking a growth index fund as opposed to a dividend fund I can live with.

    My point is starting young totally relaxes the requirements on ROI. Please check out my article if you have sometime https://dividendgeek.blogspot.com/2018/02/effect-of-savings-investment-return-time-on-retirement.html

    Who should go with DGI strategy? Those who want to supplement their regular income with dividends … as simple as that. Its likely someone at older age has this requirement … especially heading towards retirement.

    That being said DGI is an acceptable strategy for a young investor. The more important thing is saving & investing. That’s what we should teaching them.
    dividendgeek recently posted…What is financial independence?My Profile

    1. Hi Dividend geek,

      You’re totally right with most of the things you say. It’s about saving and regular investing. The point about lesses ROI is highly important.

      But I don’t agree with “At a young age it does not matter what strategy you pick. All are winners”.
      I’d say that any combination between bond funds and index-funds is a winner in the long term. But trying to spend the first 20 years bying single growth stocks such as Nvidia, Amazon and other highly complex stocks isn’t a 100% winning strategy. I think we both can agree that we have heard several people saying that they went from being a speculator to a more passive long-term investor.

      Personally, I think the DGI strategy is by far the best strategy for young investors, since it’s a time based strategy. But my main question is to try to figure out what’s best to do within the DGI universe.

      Thanks for commenting!

  2. I am a big fan of dividend investing and i have some stocks paying me about 3000 NOK pr year today and i am looking to buy more as i get more money. Until relative resently i have been in and out of stocks i thought might go up in value, but as a lot of other people i probably lost more than i made. My funds though have increased nicely. Also my rental apartment has been a great investment so far. DGI investing will be my go to strategy going forward and beeing 31 years old i consider this to a great strategy for the next 30 years in combination with my rental

    1. Hi Ogellers,

      Glad to hear that. Dividend investing is a great way to become a better investor. Epsecially if you become a dividend growth investor. Why? Because overall, the core of DGI isn’t about getting a paycheck, but it’s about finding great quality companies, with solid management, future growth catalysts. The dividend growth is just a result of many factors.

      I’m looking forward to hearing how you deploy your capital being 31. Please do tell.

  3. Why choose one or the other? Ultimately it is personal finance and the numbers are often not interpreted factually but with emotion. Agreed, as you already show in your example, that is probably not the best thing to do, but it is inherently “us”.
    I’m personally of the opinion that you should never bet on one horse, whether that be DGI, index investing or otherwise. Simply for the reason that you never know what is going to happen. Markets change, DGI stocks may reduce their appeal and cannot maintain EPS levels and/or dividends. We therefore have both dividend growth shares as well as some higher yielding ones, but still also have index funds and real estate to complete the portfolio.
    Nice thought providing post thou!

    1. Hi TeamCF

      I personally think it’s wise to have a cornerstone philosofy. Once you start to do many different strategies (growth, value, passive, active and speculative) everything becomes blurry and one might end up selling the “buy and hold” while keeping the speculative.

      I do save in indexes and funds, and I think growth in a key to any portfolio (i also keep some growth stocks), but I try to have a certain mindsett and rules for any investment. Also, it should be mentioned that this post is about the DGI universe, and not portfolio management. It’s about trying to figure out what’s the best thing a young investor can do if he follows the DGI strategy.

      Glad to see you sharing your knowlegde! Thanks!

  4. That is what I get for going off social media on weekends. I miss conversations like this pre-post. We talk about diversifying all the time across market sectors. Well the same should go for risk. If you treat your portfolio like a company, you need to have a good mix of risky and safe investments. To not have any risk would do you a disservice in the long term because you cant capitalize on that growth. But also you don’t want to put everything you have into high risk high reward investments because your portfolio overall becomes more risky.

    It also depends on one’s individual goals. If you want to retire early and live off the passive income of dividends sooner than later, you will need a good mix of higher growth and higher yield/ lower growth. I own T and HRL in my portfolio currently. So individual preference and risk tolerance comes into play.

    That is why I love personal finance, you can have all the numbers in the world, but it is still so subjective. Think the most important thing is that people are actually investing and trying to set themselves up for the future. Something is better than nothing. Just depends on how far you want to take it or see how much better it could be in the long term. Thanks for making us think.

    1. Hi Daze,

      How can one not agree with your comment?! Great answer.

      Everything is subjective, but I still feel that the question is somehow un-answered: Is HRL more risky than AT&T? Is a classic DGI company more risky than a classic DG company? Well, sure, one needs to be spesific, but it’s important to really digg deep here. I still feel we aren’t there yet. Will comment futher when I have more to say other than that I don’t think it’s smart for people with 40 year time-horison to mainly focus on proxy-bond stocks such as AT&T. We can be more agressive than that.

  5. Sorry, couldn’t comment earlier due to a health issue.

    Regarding your example of T and MDT (Medtronic), these two fall under two classic types of dividend stocks:
    1) Pays a higher current dividend but lower dividend growth –> tend to have lower price appreciation
    2) Pays a lower current dividend but higher dividend growth –> tend to have higher price appreciation

    Which one to pick? Well it depends on whether you are in accumulation phase or collection phase. Most young people are in accumulation phase and don’t need income from dividends. They could or probably should focus more on growth type 2 dividend stocks. While the older folks who are near or in retirement are more current income focused so they should invest more in type 1 stocks.

    Again, I’m talking about dividend stocks regardless of which type you invest in. Dividend helps reduce the overall risk in an investment, so even high growth stocks that pay dividend can be considered as low risk when compared to pure FANG type non-dividend stocks.

    I for one, like to own a mix of both types of dividend stocks, it gives my portfolio some nice growth while maintaining a very healthy current dividend yield.

    Also, just because a stock has been a type 1 stock in the past, it doesn’t mean it won’t or can’t change into a type 2 stock. Many of the older tech companies like Cisco, Intel, IBM, Nvidia have gone through phases of being Type 1 and Type 2. So just because Nvidia is a hot fast growing stock today, doesn’t mean it has been that way all along. Nvidia stock price has been quite range bound between 2010 – 2015. In late 2016, it broke out upward and has been going since then.

    Same can happen with Intel or Cisco or even T. Cisco and Intel are starting to breakout from their stagnant stock price growth, they could be the next Nvidia.

    AT&T has been investing to be more than just a telecom company, I look at it as a major infrastructure and technology play due to its dominant role in upcoming 5G. So, T could be the next Nvidia or Boeing.

    As for Medtronic, it’s dividend growth had slowed down to single digits after recession between 2010 – 2015. High growth is not sustainable forever. Where as a 2% annual growth is quite sustainable even through a recession. AT&T continued to pay a 2% dividend in the midst of a recession.

    Sorry for a very long comment, but the point I’m making is that these fast or slow growing companies don’t always stay fast or slow, they go through cycles of moving between the two types and therefore, one should own both types. And again, I only speak of dividend paying stocks.

    p.s: Nvidia does pay a tiny dividend, so it is currently a Type 2 stock.
    Mr. ATM recently posted…Micro Blog #21 My Tactics For Investing In Dividend StocksMy Profile

    1. Hi Mr. ATM

      Well, first let me just give you some credit for being one of the few people people who attacted my question: High growth and low yield or high yield and low growth?

      You also come to the same “conclusion” as me, which is that young people should probably at least on quite the amount of the second type, maybe be overweight in growth rather than income.

      Yeep, 100% true. Past CAGR isn’t a sign of what will happen in the future, and that’s something we DGIs need to understand. Maybe especially in the retail market were internett and e-commerce hasn’t really had it’s impact before now. Thinks change, and using historical numbers (such as 10 year p/e) to say that this stock is a buy or not, well, it’s just a factor in a larger discussion.

      The income from stocks such as AT&T brings a lot of SWAN feeling, and I’m sure it will feel even better getting a paycheck when the media writer “stocks are worth nothing. ….Panic everywhere”. That’s when I think safe dividend stocks will shine and we shall see the strengt in our strategy.

      Right now, with higher interest rates (forcing utilites and reits down) and a market that favours tech, it’s easy to say that the dgi isn’t good enough, and that one should just do indexing. But then we forget that most of the time, we actually expect to underperform in bull markets and overperform in bear markets. As of now, I have yet to experience this overperforming and looking forward to seeing it happen (if it happens). Just hope I can continue adding to my positions when every seeking alpha article is bearish and arguing that the stock is doomed.

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