The Ultimate Dividend Growth Investing Guide

Updated: Dec 18, 2021

Table of Contents

Why Dividends?
Example Portfolio
How to Rebalance a Portfolio
When to Sell?

What is Dividend Growth Investing? Dividend growth investing is an investment strategy that seeks to invest in companies with high-quality dividends. Dividends are payments made by a company to its shareholders, usually on an annual basis. Dividend growth investing does not require active trading or any timing of entry and exit points; it's all about the long game!

Typical long-term investing strategies include selling portions of your portfolio each month or year to generate money during your retirement years. You may sell 3-4% each year and live off your portfolio for years, but what if the market falls significantly? Dividend investing was created to help you answer that question. Consider earning 3-4% per year and never having to sell a single share. Imagine creating a portfolio that could last a lifetime by adding up all of your dividend earnings from prior periods. Your children may also benefit from your passive income portfolio and make a living off of it. So, what exactly are dividends? Dividends are cash payments that a company makes to shareholders in the form on profit. Dividends can be paid twice a year, quarterly, or even monthly. Companies pay out dividends ranging from $0.10 to $6 per share or more. You aim to collect these dividends as an dividend growth investor in order to build a passive income stream for retirement use. If you're just getting started, check out this guide on choosing the right stock broker.

So why dividends?

Historically, dividends have had a significant impact on the total return that stock market investors receive. According to the Hartford Funds example study of the importance of dividends and compound interest, they accounted for 84% of the SP500 return in the last 40 years. Dividends are important because they represent a portion of the company's earnings that are paid to shareholders. Dividend growth investors love dividends because they provide them with a steady stream of income, which can help them cover their expenses in retirement. Dividends also have another added benefit: compounding. When you reinvest your dividends into more shares of the same stock or another dividend-paying stock, you're buying at a lower price and getting even bigger payouts down the line. Over time, this can result in significantly larger portfolio values than if you had just left your dividends alone. Reinvesting dividends is one of the key tenets of dividend growth investing, and it's what allows investors to build ever-growing streams of income.

Dividend growth has outperformed the SP500 Index, with a track record of slightly greater returns and lower volatility over time. Dividend growers and creators have generated 13.20% return with a standard deviation of 12.57 percent when compared to the SP500 index's 12.57 percent return. When you compare dividend growers/initiators to the SP500 Index, this difference doesn't appear to be significant; yet it translates into a difference of $7,582 in capital appreciation per $100 between 1973-2020.

Capital appreciation is important but dividend growth's track record has produced slightly higher returns than the SP500 Index and lower volatility over time. Dividend growers and initiators have returned 13.20% with the lowest standard deviation when compared to the 12.57% return of the SP500 index. This difference doesn't seem like a significant amount but equates to a difference of $7,582 in capital appreciation of $100 between 1973-2020 when comparing Dividend growers/initiators and the SP500 Index.

There are both disadvantages and advantages to dividend growth investing:


  • Dividends are not always guaranteed. In 2020, there were dozens of companies that cut their dividends due to financial pressure. At any moment, companies can decrease their dividend payout or completely get rid of it. However, many of the companies on the Dividend lists maintained and even increased their dividends during this time. This highlights the importance of investing in quality companies.

  • Dividends are taxable if held in a taxable brokerage account.

  • When compared to index investing it decreases diversification since you're really only invested into “large cap” stocks. You'll be missing out on the mid-cap and small-cap stocks. This can be overcome by investing in various ETFs.

  • You have to pay attention to the companies you are investing into to ensure they remain healthy and can continue to grow and increase their dividend.


  • Reinvesting dividends during sideways moving markets, bear markets, and corrections, purchases more shares with the dividends while the prices are lower.

  • Historically dividends have provided 41% of the S&P 500 total return across the last eight decades.

  • Creating passive income without having to sell you underlying capital. That capital will continue to grow as companies raise their dividend. Your passive income could grow even if the underlying asset has decreased in value due to a price drop or bear market. You don't need to worry about selling shares in retirement if the stock market falls as long as the dividend remains intact.

Dividend Growth Investing Goals

  • Build an income focused portfolio that revolves around dividend paying stocks. Hold those shares for years as they increase in value and increase their dividend.

  • Seek out a balance between growth and income. Desired yield will depend on age as older investors focus on shifting to higher yielding assets with less growth. Ideally, if investing early enough, an investor's yield on cost rises to meet income goals in retirement.

  • Use incoming dividends and DRIP to purchase more shares and then hold those shares into retirement.

Terms associated with Dividend Investing

1. Cash Dividends

Dividends that are paid out in cash directly to the owners brokerage account. Cash dividends are the most common.

2. Declaration Date

Date that dividend is announced.

3. Dividend Aristocrats

Companies that have been growing their dividends for 25+ years

4. Dividend Challengers

Companies that have been growing their dividends for 5+ years

5. Dividend Contenders

Companies that have been growing their dividends for 10-24 years

6. Dividend Kings

Companies that have been growing their dividends for 50+ years

7. Dividend Yield

The percentage of the share price that is paid as a dividend is calculated using dividend yield. The formula to calculate how much your investment will be pay is:

Investment Amount X Dividend Yield = Annual Dividends (Passive Income)

For example if you invest $10,000 into Johnson and Johnson ($JNJ), which yields around 2.39% as of this writing, you would get paid $239 a year. This would equate to $19.91 per month. This would continue to grow if JNJ continued to raise their dividend, which they've done for 59 years straight! Here's the formula using our example:

$10,000 X .0239 = $239

You can use a variation of the same formula to calculate how much you would need to invest to earn a particular amount in passive income. For example, if you wanted to earn $24,000 in passive income a year, how much would you need to invest?

Annual Dividends (Passive Income) / Dividend Yield = Investment Amount Required

Using the JNJ example above and our example that we wanted to earn $24,000 we would need to invest $1,004,184. Here's the formula using our example:

$24,000 / .0239 = $1,004,184

Dividend investment examples

Dividend yield is calculated using the current stock price and the current annual dividend. JNJ's stock currently sells for $179.44. It also pays a quarterly dividend of $1.06 or $4.24 per year. The formulas for the example are below:

Annual Dividend / Current Stock Price = Dividend Yield

$4.24 / $179.44 = .0236 (or 2.36%)

Companies sometimes continue to raise their dividend after you purchase shares. For example, the Dividend Aristocrats is a list of companies that have been paying and raising dividends for at least 25 years. How this factors in for you is what is known as yield on cost.

8. DRIP (Dividend Reinvestment Plan)

These are programs offered by most brokerages to reinvest you dividends automatically to buy more share or fractional shares of the company that paid the dividend. These were widely popular when brokerages had commissions on stock purchases and their DRIPs didn't charge a commission when reinvesting. Most brokerages today have commission free trading so enabling DRIP is a personal investor choice. You can easily purchase shares of your choice with your dividends if you choose not to use DRIP.

9. Ex-Dividend Date

The first day that new buyers are not eligible to receive a dividend. Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.

10. Ordinary Dividends

Dividends that are taxed as ordinary income at the federal tax level. To learn more about the types of dividends and taxes check out this post.

11. Payment Date

Date a dividend is deposited into your brokerage account.

12. Qualified Dividends

These dividends are treated as long range capital gains and therefore taxed at a much lower rate than ordinary dividends. A majority of dividends fall into this category. To learn more about the types of dividends and taxes check out this post.

13. Record Date

The official owner on this date gets the dividend. It takes three business days from purchase to be the owner of record. Thus, you would not collect the dividend if you purchased two days before the owner of record date. In other words, the ex-dividend date (date not eligible to collect dividend) is two business days before the "owner of record" date.

14. Special Dividends

These are dividends that are not paid on a routine basis and are normally higher than the average dividend. Special dividend can be paid at any time if the company has extra cash they wish to return to shareholders. The nature of these dividends is unpredictable and shouldn't be relied on as part of your passive income.

15. Yield On Cost

Yield on cost is the dividend yield based on the current cost of your shares in your portfolio. You can calculate yield on cost using the above formula but you use your cost (cost basis) in place of the current stock price. Yield on cost can increase your passive income considerably over 10-40 years of investing.

Annual Dividend / Cost Per Share (Cost Basis) = Yield on Cost

Warren Buffet invested in Coca-Cola in 1988 and his company owns around 400 millions shares which is $1.299 billion. His yield on cost in 2021 is 52%!

Example for Portfolio for Beginners

This portfolio is built on a foundation of Exchange Traded Fund (ETFs) with low expense ratios and strong track records. Of course, past performance doesn't equal future performance. The portfolio balances diversity, growth, and dividends. This allows beginners to start investing and get their money working for them as they continue to learn the stock market. Once, you understand how to pick stocks you can branch out or stick to this portfolio.

The portfolio consists of 30% Vanguard SP500 ETF ($VOO), 35% iShares Core Dividend Growth ETF ($DGRO) and 35% Charles Schwab US Dividend Equity ETF ($SCHD). This mix tracks closely to a similar portfolio consisting of 100% $VOO or 100% Vanguard's Total Stock Market ETF ($VTI) but produces more income for dividend investors.

The example portfolio starts with a $10,000 investment and then invests $500 a month from July 2015 - Aug 2021. The compound annual growth rate (CAGR) is only .70% less than a portfolio consisting of $VTI or $VOO. The income from the example portfolio produces 32% more income than $VOO and 37% more income than $VTI alone. The dividend yield of the example portfolio was 2.1% as of September 2021. This portfolio is designed to get you started quickly so you can then add other companies as you learn more about investing.

How to rebalance your portfolio

As you hold a a mixed allocation of assets some will grow faster and some will grow slower. If you want to understand portfolio allocation and stock sectors. Check out this post. It's normal for your portfolio to become unbalanced over time. Each stock or ETF in your portfolio should have a goal percentage assigned by you. Rebalancing frequency is up to you as the investor. Below is my portfolio as of September 2021 with my personal goal percentages. This is straight from my portfolio template.

There are two main ways you can rebalance a portfolio, either by using a Sell/Buy or a Targeted Investment strategy


You may sell stock in firms that have appreciated in value. This is my least favorite choice since it would result in taxable events inside your portfolio that you would need to account for. It also sells your assets, which are usually the most successful. If you pick this path, you'd take the profits from one firm and invest them into a firm requiring funding to reach your goal percentage. You may rebalance or redistribute your portfolio this way every four weeks, semi-annually, or annually. To lower your taxes, sell any stock that has been held for longer than a year. Remember that any shares sold that were kept for over a year would be classified as long-term capital gains, which are taxed at a significantly lower rate. You can do this by setting FIFO or First In, First Out when selling on your brokerage account.

Targeted Investment

The second strategy I utilize is the one I recommend. When I add new shares to my portfolio, I rebalance it monthly. Every month, I contribute around $3000 to my portfolio. Instead of selling shares, I purchase lower-percentage investments with the extra cash. For example, if AAPL's percentage in my portfolio was at 2.47%, I'd buy another share or two to bring it up to 3%. This technique does not result in taxable events within your investment portfolio.

It's important to remember that you don't have to be married to your goal allocation. You could invest more or less in any company or ETF you own at anytime. In early 2020, I bought a significant stake in Apple which caused it to become 14% of my overall portfolio. I saw an opportunity to purchase Apple prior to their stock split that I wanted to take advantage of. I offset this by not purchasing Apple shares for another ten months so it slowly returned to around 4% naturally as I funded my account. You can also use a combination of Buy/Sell and Targeted Investment if that method suits your needs at the time.

How should you employ dividend reinvestment (DRIP)?

Dividend reinvestment plans assist you in automatically reinvesting your dividends. When you have a DRIP plan set up, the businesses you own pay you dividends and your broker buys more shares with the cash. Many novices wonder if they should use a DRIP. Because there were previously high costs for purchasing stocks, DRIP was created to allow investors to purchase stock without paying extra fees. Most brokerage firms now provide free trading, so that advantage is no longer available. If you're uncomfortable with the idea of forgetting to reinvest your dividends, Dividend Reinvestment Automation might be a good fit. This is possible due on account of the automation. You should continue to reinvest your dividends until you need to rely on that income. As previously stated, dividends are a substantial component of overall market returns. Another alternative is to cancel DRIP and reinvest your dividends by focusing on firms you wish to re-invest in. You may also use them to rebalance your portfolio as previously said. DRIP is a personal decision for everyone. When I was on duty in the military, I used drip because internet connectivity was unreliable. I also DRIP'd until I made $100 per month. That's when I decided to leave DRIP on for some firms and turn it off for others. For example, I kept DRIP on for Apple and my ETFs. Again, how and when you utilize DRIP is entirely up to you.

When should I sell my stock shares?

Each company I invest in I plan to hold for as long a possible. I analyze the company and their performance metrics prior to investing. Each company added serves a purpose. Normally, if I can explain why I want to add a company to my Wife so that she understands it I know I've done enough research. The reasons I sell shares are:

  1. The investment no longer matches the reason I added it to my portfolio

  2. The dividend is cut or eliminated

  3. The investment consistently underperforms

  4. The metrics I use to evaluate the company indicate the dividend is at risk

  5. The position has gotten to large or I want to rebalance

The investment no longer matches the reason I added it to my portfolio

Every stock I invest in has a purpose inside my portfolio. Be that dividend yield, growth, income, or sector assignment. For example, at one time I owned Johnson N Johnson ($JNJ), Merck ($MRK), and AbbVie ($ABBV). I sold my JNJ and MRK shares to consolidate into ABBV. I also plan to sell my growth stock as I approach retirement to invest in more income producing assets.

The dividend is cut or eliminated

The primary purpose of my portfolio is to build a passive income stream that I can use to retire early. A position that cuts their dividend or eliminates it could reduce my passive income by 2%-10% or possibly more. It's important to remember that these aren't hard and fast rules. Disney ($DIS) eliminated their dividend during the Corona Virus pandemic. In my eyes this was a smart move since their Disney parks and Cruise lines were closed. I chose to keep DIS and it still makes up 3% of my portfolio to this day. Had I sold Disney I would have missed out on a sizeable amount of growth in their share price.

The investment consistently underperforms

An asset that underperforms the overall market could drag down your portfolio's performance. Under performance of 1% over 30-40 years could substantially impact the end dollar amount that shows up inside your brokerage account. It's important to remember that assets could underperform one year then perform extremely well later. Keeping a company is a risk. When I started investing I chose to invest in Nike ($NKE). I held them for about nine months before I chose to sell. The investment had only grown 2%. What happened after I sold? Nike sprung up 12% the month after I sold. I got impatient and emotional which clouded my judgment. Nike was a solid investment but I was more worried about performance.

The metrics I use to evaluate the company indicate the dividend is at risk

I routinely check my investments to ensure that they are healthy and can continue to pay their dividends. Understanding dividend payout ratio, free cash flow, profit margin, and more is important. I personally try to ensure my assets keep their dividend payout ratio below 70 for example. Once, I see the metrics indicating that the dividend growth could slow significantly or become unsafe I tend to exit my positions. You can check out this post to understand how I evaluate dividend stocks.

The position has gotten to large or I want to rebalance

This is the metric I use the least and is a personal choice. If one of my assets starts to dominate my portfolio I consider selling the profits to rebalance. Normally, I keep an eye out for assets that are 2%-4% above my target allocation. The danger with selling an asset that is performing well is that you could be selling some of your best performers. Additionally, when you sell you need to consider the tax implications.

I hope this blog post helps you learn more about Dividend Growth Investing through my story! I look forward to hearing your feedback in the comments below! If you enjoyed this content don't forget to subscribe so that you never miss out on anything new!!

Happy Investing!

Check out my other posts and be sure to subscribe so you never miss our new content.


Recent Posts

See All