Consider Dividend Growth Stocks for Your Investment Portfolio
There’s a saying: “The rich get richer.” This could be said to refer to individuals that are proficient at growing their initial investments over the long term. And they often do this by only owning businesses with simple operations. If you want this saying to start applying to you, consider investing in dividend growth stocks.
Today, I will be discussing a dividend growth stock with a yield over eight percent. That’s four times more than the average dividend being offered by the markets. Sound too good to be true? I thought so at first too. However, the more research I did, the more apparent it became that dividend growth stocks such as this are great for building long-term wealth.
Before getting into the details of this potential investment, however, let’s go through the benefits of investing in a dividend growth stock.
Benefits of Investing in a Dividend Growth Stock
A dividend growth stock is a stock that pays out a dividend on a regular basis, with said dividend increasing as time passes in line with growing profits. For a rising dividend, the company’s earnings must be very consistent.
Below are the benefits of investing in a dividend growth stock.
1. Earn a Return Regardless of Market Conditions
Let’s say you invested in a stock that was trading at $10.00 per share and did not pay a dividend. Therefore, your returns would be based solely on the performance of the stock. This could lead to some poor investment decisions and negative investment return.
Now, let’s say that same investment happened to pay out a dividend of $1.00 per share at the time of the initial purchase. This would result in having at least a flat investment return, since the dividend would compensate for any negative returns from the stock trading price.
Another benefit of investing in a dividend growth stock is that total returns are determined using both the stock price performance and the income received. This lowers the reliance on the markets to perform positively over time.
2. Dividend Growth Stocks Avoid the Concern of Running Out of Money in Retirement
Today, individuals are living longer than ever before. The one concern they share, however, is the possibility of running out of money in retirement. This may happen due to inflation in the cost of goods and services that was not factored in when planning for retirement.
On average, inflation is right in the range of three percent; something that costs $100.00 would then cost $103.00, and so on. But rather than cutting items out of your budget, dividend growth stocks could help fight against the cost of inflation. That’s because the dividend’s increases are normally in line with or above the inflation rate. This is why it is important to understand everything about a company; in some cases, earnings and margins are protected from inflation. This over time will help a steady and growing dividend. Of course, this would only apply to a strong business with quality cash flow and a steady, growing dividend.
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3. Less Investment Volatility and More Preservation of Capital
During good times, almost every investment will have a positive return. This is due to investors bidding up the stock price because they do not want to miss out on the rally. The real test for any company is in a downturn, since investors only want to own the very best investments in these times. Stocks that pay out a dividend outperform those that do not, as investors want a return paid on their investment capital. As such, companies that have a track record of increasing their dividend tend to perform better.
There is also less daily volatility seen by dividend growth stocks in comparison to the overall market. This is due to the fact that there is a dual-based return through the income and stock price appreciation. Also, the dividend is paid via the company’s earnings; therefore, a growing dividend means growing earnings and, in turn, a higher trading price.
SIR Stock a Dividend Growth Stock That Has Rewarded Investors
One company that hits all the beats above is Select Income REIT (NASDAQ:SIR). Its 8.72% high dividend yield is what initially caught my eye, but as I dug deeper into the company, I discovered just how much this potential investment opportunity could greatly benefit my readers.
The company is engaged in real estate; specifically, it owns more than 350 industrial and office properties in 35 states, which are leased to tenants. The tenant base is very diversified, with eight different industries leasing properties, including the technology and communications, retail and food, real estate, and financial services sectors. Some of the more notable names are F5 Networks, Inc. (NASDAQ:FFIV), Bank of America Corp (NYSE:BAC), and Amazon.com, Inc. (NASDAQ:AMZN). No single tenant accounts for more than four percent of total revenue. (Source: “Select Income REIT REIT Week 2017: NAREIT’s Investor Forum June 2017,” Select Income REIT, June 25, 2017.)
The business only seeks to own high-quality properties that have a strong probability of reaching max occupancy and a high chance of renewal by tenants. The average lease agreement is more than nine years in length, ensuring steady and predicable cash flow. Some of the contracts also have embedded rental increases or see their rent increased upon renewal.
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Get Paid a Growing Payout
SIR stock’s initial public offering (IPO) occurred in 2012, and the dividend has always been present since, with efforts to increase it as often as possible. In the dividend’s second year, it saw an increase of 4.7%, which is about 56% over the inflation rate. And since the IPO, there have been a total of six dividend hikes for a total per-share increase of 27.5%.
With dividend growth stocks, the per-share payment should gradually increase. SIR also features a high yield—about 35% higher than the industry average—and when the present dividend is calculated against the average purchase price of the shares, the average dividend yield would increase.
The dividend can continue to grow as long as rent fees do, and there should also be appreciation seen in the buildings’ prices, which would be reflected in the stock price. But above all else, the company’s past behavior in regards to the dividend shows the greatest evidence that future hikes are likely.
Final Thoughts About Owning a Dividend Growth Stock
There you have it: a few reasons to consider a dividend growth stock for your investment portfolio. SIR stock should be considered as a potential investment for its shareholders benefits, including its growing payout. There aren’t many better ways to own a real estate investment without the need to manage tenants or appease a landlord.