Dividend Growth vs. Dividend Yield: Choosing the Right Approach

Investing in the stock market is always a waiting game. You invest in a company, hoping for the price to rise so you can sell at a profit. But what about the passive income that comes with the ownership of a stock? That’s where dividends come in – a portion of the company’s earnings that are given to shareholders.

When it comes to investing based on a dividend mindset, there are two primary ways to approach it: dividend growth and dividend yield.

Dividend Growth

Dividend growth means investing in companies that have shown a history of increasing their dividends consistently over time. The idea behind this approach is to invest in companies that maintain a track record of financial stability and growth. Companies that can continue growing their dividend payouts despite economic downturns are likely to be financially secure and well-managed.

Some investors tend to focus on how much each share will generate in dividend payments each year. However, with dividend growth, it is not so much about the current yield but rather the potential for sustained growth rates in the years to come.

Dividend Yield

On the other hand, dividend yield focuses on the current dividend payout divided by the stock’s price. This approach looks for companies that are paying out a high percentage of their earnings as dividends. These high-yield stocks are attractive to investors who are seeking out a consistent stream of income.

While high yield may look great on paper, it does not necessarily mean that the stock is a good investment. Companies with exceptionally high yields could be stretching themselves thin by paying out too much in dividends, leaving little to no earnings for future growth.

Which Approach is Right for You?

Both dividend growth and dividend yield have their pros and cons. However, investors must determine which approach fits their investment goals and risk tolerance.

Dividend growth is ideal for long-term investors who can take a long-term view of investing. These investors prioritize the financial growth and overall stability of a company over the current yield. They are willing to sacrifice immediate gains for future gains.

On the other hand, dividend yield is ideal for investors seeking a consistent stream of income. It is a great option for individuals in retirement who are looking for a steady source of earnings to supplement their income.

Ultimately, a combination of both approaches can be the best solution to achieve a well-rounded dividend stock portfolio. By diversifying your investments, you can mitigate risks and maximize your earning potential.