Hello! In that case, you want financial security? You’re in the right place,
and I’m not referring to some kind of sorcery spell here, so if you think
dividends and compound interest are witchcraft, let’s be honest: there’s no
judgment here. Today, we are going to explore what is known as Dividend
Growth Investing or DGI for short—or better known as “Getting Paid to
Wait.”.
Consider for instance planting a mango tree. You dig a small hole, put the
tree in it, water it, and then, one day, you are resting in the shadow, picking
mangoes here and there, without moving your bum. That’s how dividends
work—except these ‘mangoes’ are cold, hard cash placed straight into your
account.
So, you ask, what’s dividend growth investing anyway?
Dividend Growth Investing or DGI, as it is commonly known, is all about
investing in common stock in companies that not only pay out dividends
but increase their dividend payments continually. Just remember this
statement:
What if the chips you like to eat provided you with something
extra the next time you fed on them?” You are getting fat from your snacks
and they are telling you, Thank you; have another helping.
Dividend growth stocks are generally those you buy with the intention of
receiving a regular perpetuity income. Of course, instead of actually
working 9 to 5 (or, let’s be real, 9 to 9), you’re letting money earn for you
and compound over time instead of spending it on lattes.
How Dividend Growth Creates Passive Income
Let’s break it down:
- You invest in dividend stocks. Pick companies that give out a
piece of their profits to shareholders—that’s you. - The company pays you dividends regularly. These dividends
come in the form of cash per share (for example, $2 per share). - The dividend grows over time. The magic sauce: not only do
these companies pay, but they’re committed to paying more each
year. So, that $2 per share might turn into $2.20, then $2.50, and so
on. - You reinvest dividends. Here’s the power move—use those
dividends to buy more shares, which then earn you more dividends.
This cycle repeats, leading to compounding growth and an
ever-growing mango tree of money.
How Dividend Growth Investing is Gen Z’s Best Friend
Okay, let’s be real. Today has become free for all in career-hopping, and
freelancing is almost expected of everyone. DGI is perfect for Gen Z because
it’s like that passive side hustle that doesn’t require weekly Zoom meetings
and surprise deadlines. It’s money you control.
Imagine it as an “income upgrade” where you don’t have to work more
hours, send out any emails, or speak to customers on the phone. Also, you
don’t even have to go through it day by day (unless, of course, you have
some particular interest in stock quotes, and if so, full speed ahead).
How to Forecast Your Passive Income
Okay, get your calculator ready or, even better, let’s use an easier example
where numbers won’t confuse you. Here’s a step-by-step guide to
calculating your passive income potential:
Step 1: Calculate Your Capital with Which You Are Willing to Start
Say you have $1,000 to start. You identify a dividend stock that offered a
yield of 4 percent. Yield is in fact the amount of cash that you’re going to
receive in the form of dividends in relation to your investment amount. A
4% yield simply means that per annum, you are expected to receive four
dollars for every hundred dollars invested. Well, at $1,000, that’s $40 per
annum.
Step 2: The third thing is to determine the dividend growth rate.
This is the cool part. From the DGI perspective, a good stock is one that
pays dividends and has the added bonus of growing the payouts yearly.
Suppose this company has been earning a 5% annual increase in the
dividends it pays out. However, that $40 you are making in the first year
may turn to $42 in the next year and so on.
Step 3: Factor in Compounding
You could now use that $40 to go have dinner, you know. Or, you could
spend the money to purchase additional shares, as these will also begin to
issue dividends. This reinvestment has a domino effect on other segments
the information service industry is involved in. Let’s do some (fun) math:
● Year 1: $1,000 earns you $40.
● Year 2: You now have $1,040 invested, earning 4% = $41.60.
● Year 3: You have $1,081.60, earning 4% = $43.26.
It doesn’t sound like much at first, but over a few years, compounding takes
off like a Bollywood action scene. Just sit back, reinvest those dividends,
and let the growth work its magic.
Step 4: You have to understand how to use the dividend growth rate to
estimate your future income.
Now for the big picture: in the long run, if you continue with this, the
passive income can supplement the active income some few years down the
line. For instance, if you are making an investment of $10,000 with a 4%
rate of return, then after the first year you generate $400. Through
dividend reinvestment at a rate of 5% per year, that income could increase,
in the period of 15-20 years, to more than one thousand US dollars each
year. Well, the money will be a lot; you thought it’s a lot of money being
spent on coffee.
The Five Steps on How to Pick Dividend Growth Stocks
It is, however, important to understand that not every stock should be
taken to DGI. Companies you want to work with will be ones that are like
the friend who always brings chips and never leaves a friend hanging. Here
are a few key things to look for:
Dividend Yield: Normally ranges from 2 percent to 5 percent. If it’s below
that, then it’s barely served; if it’s above that the other way around, it can be
a scam; some returns with extremely high yields can be unrealistic in the
long run.
Dividend Growth Rate: It’s desirable to go for firms that have a track record
of short-term dividend growth. They should be in that range for the past
5–10 years with consistent growth.
Dividend Payout Ratio: This gives you a picture of how much of their
earnings a particular company is paying out in the form of a dividend. A
ratio below 60% is generally safe, but ratios of over 100% are less safe. If
they’re paying out all those amounts, they’ll surely not save enough money
for expansion.
Industry: Heavy industries such as utility, healthcare, and consumer goods
are most likely to provide consistent dividends.
Real-Life Example: Starbucks, Anyone?
For example, you invest in shares of say Starbucks, which is a company that
is recognized for paying out dividends. If the stock costs $100 and yields
2%, you think that you have $2 per share per year in terms of yield
annually. However, Starbucks also boasts of raising its dividends, meaning
that this $2 could grow to $2.20, $2.40 and the rest in a given year.
If you buy 100 shares, that’s $200 a year in free coffee money. Or reinvest it
and let the compounding continue while you sip on your free (okay,
technically not free, but you get it) iced caramel macchiato.
The Pros and Cons of DGI (Because No Strategy is Perfect)
Pros:
● Passive Income: You don’t have to lift a finger after you invest.
● Growing Cash Flow: With dividend growth, your income increases
over time.
● Compounding Power: Reinvested dividends lead to a snowball effect
on your investment.
Cons:
● Requires Patience: DGI isn’t a get-rich-quick scheme. It’s more of a
“get rich while-watching-the-series” strategy.
● Market Risks: Even stable companies can take a hit during
recessions, which may impact dividend payments.
● Dividends are Taxable: Sorry, but yes, Uncle Sam (or your local tax
authorities) will want a slice of your pie.
Final Thoughts
Dividend Growth Investing might not give you overnight wealth, but it’s
one of the most stable ways to build passive income. With time, patience,
and a little discipline, DGI can help fund your Netflix subscription, coffee
habits, or, hey, even cover your retirement needs. Just remember: the
earlier you start, the longer your money has to grow.
And if you’re ever in doubt, just remember that dividends are like a slow
cooking, high-yielding recipe. Just keep stirring, let the magic of
compounding do its thing, and soon you’ll be tasting the sweet returns of
your investment!