Dividend Growth Investing: The Ultimate Guide for Beginners (2022)

You want to know more about it, right?  

You heard one of your friends mention how they are planning to live off of passive income in the future thanks to their dividend stocks.

You kind of know what a dividend is, but can you really build wealth with dividends?

Dividend investing in general is misunderstood. That’s why you may feel unsure about pursuing this method of investing.

In this article, you will learn what a dividend is, how dividend growth investing works, how you can supercharge your dividend returns and how you can build an amazing stream of income for life. 

What is a Dividend? 

Dividends are payments made from a company’s profits that are redistributed to its shareholders.  A shareholder is someone who owns shares in a company.  

If you want to get technical and impress your friends on trivia night, a company’s dividend is paid from a company’s cash account via the free cash flow it generates.

Most companies pay dividends quarterly, but Real Estate Investment Trust (REIT) shareholders are paid monthly. Generally, large index ETFs pay their dividends out semi-annually in Canada. 

How do Dividends Work?

If a company earns a profit, it can choose to either reinvest those funds back into the business or pay out dividends.  A superb company can do both.  

As a shareholder, you get paid your dividends by the company and you keep the same amount of stocks you originally had.  In the next quarter, you receive your dividends again.

What a beautiful feeling it must be, right?

A growth stock can only make you money one way, via price appreciation.  The only way you can get cash out of a growth stock investment is to sell part or all of your shares.

Price Appreciation (capital gain): If you purchase 50 shares of a stock at $10 per share, you pay $500.  If the price increases to $12, then you have a gain of $2 per share. You can now sell your shares for $12 ($600 total value) which leaves you with $100 of profits.

To make that profit, though, you had to sell your shares, so you have 0 shares left.  Now you have to find another investment to make.  

However, a dividend growth stock can also make you money via dividends. 

Dividends: Remember, a company may decide to pay you a slice of its profits because you are a part-owner. You don’t just own a stock ticker that bounces up and down and stays sideways; you own a piece or a real, tangible business.

If a company pays a $1 dividend per share annually and you have 20 shares, then you will receive $20 in dividends each year.  If you own 1,000 shares of the company, you receive $1,000. 

If your friend opened up a pizza store and you invested a tiny amount of your dollars into the store, would you not want your tiny slice of the profits too?  It’s the same line of thinking here. 

The difference between this dividend growth scenario and the one where you open up a pizzeria as an owner (like your friend) is that you don’t have to work all those long hours and deal with business administration issues. 

When you own dividend stocks, you are like the silent business partner.  If you purchase blue-chip stocks, you get an experienced management team running the company and cutting you a piece of the profit pie.  That is why this type of investment is called passive. 

Others do the work. 

You collect your cheques.

The majority of your work happens upfront when you do your research and decide whether a company is worth the investment.  Once you own the shares of a company, then you only need to monitor the business progress every quarter to see how it is performing. 

Why Do Companies Pay a Dividend? 

Companies pay dividends because they believe that it is the most optimal use of their cash and they want to split the profits with their shareholders.

But how does this happen?

First, we need to get two quick definitions from the cash flow statement to help with this explanation. 

Operating cash flow: Operating cash flow is the cash that a company receives from normal day-to-day business operations.  Naturally, every business wants to run its operations and produce healthy cash flows.  A positive operating cash flow means that a company can pay its bills. 

Free cash flow: Free cash flow is the difference in cash generated from the operations of the business minus any capital expenditures (CAPEX).  An example of capital expenditure is a production facility that needs to be built.

Free cash flow represents a company’s real cash profit.  Free cash flow can be used for anything really but is especially valuable to shareholders when it is used to pay dividends or for buying back shares.

Operating cash flow is a larger number than free cash flow, and the difference between the numbers represents the cash flow needed to pay for capital expenditures. 

So if the operating cash flow from the normal day-to-day business operations is $500, and the CAPEX is $300, then a company’s free cash flow is $200.  Free cash flow is important because dividend payments come from it.

Operating Cash Flow $500 

(Capital Expenditures $300) 

Free Cash Flow          $200

When a company is young and growing, any earnings they make from operating cash flow are used to reinvest back into the business so that it can grow quicker. 

In time, the business eventually sees its growth slow down, and it matures.  It will no longer be easy to grow at 20 or 30% per year anymore because the business has grown so large. 

At this point, a very solid company will generate a healthy amount of free cash flow. 

This might happen because the company may have fully completed production facilities, research and development laboratories and distribution centres.  Now, instead of using hundreds of millions of dollars to pay for the construction of these structures, the buildings only require maintenance. 

The business does not need as much money as it once did to sustain itself. So all the money that used to be directed towards CAPEX could then be redirected to:

  • Bolster the company’s cash account
  • Pay out dividends
  • Buy back shares
  • Stockpile to use for future acquisitions
  • Pay off debts

Revenue generation may be easier because the company has built itself an economic moat as a powerful brand.  

It is at this point that a shareholder-friendly company would look to share its profits via a dividend or increase the value of a share by undertaking share buybacks, all from its free cash flow. 

A company at this stage, decides that the best use of cash is to reward its shareholders.

Common Dividend Metrics

1. Dividend Yield

You can calculate a stock’s dividend yield by taking the annual dividend per share and dividing it by the stock price.  The dividend yield is a percentage.  

If a company has a stock price of $100 and a dividend per share of $3.50 annually, then the dividend yield is 3.50/100 = 3.5%.  

When the price of a stock goes up and the dividend per share stays the same, then the dividend yield goes down. 

If the price of a stock goes down, and the dividend per share stays the same, the dividend yield goes up. 

Suppose the company’s stock price increases from $100 to $120 per share, and the dividend stays at $3.50 per share.  The dividend yield would now be 3.50/120 = 2.92%. 

If the stock price goes down from $120 per share to $80, and the dividend is still $3.50 per share, then the dividend yield is 3.50/80 = 4.38%.     

Be careful when reading the dividend per share on different websites. Sometimes dividends are listed as a quarterly dividend payment amount and not the annual dividend payment amount. 

For example, TMX Money lists all company dividend payments as quarterly or monthly payments. 

To calculate the dividend yield, you would have to multiply the quarterly dividend per share by four to arrive at the annual dividend per share. 

A website might list a company’s dividend at $0.50 per share per quarter.  To find the annual dividend per share, just multiply the quarterly dividend by 4, $0.50 * 4 = $2.00 per share, annually. 

2. Dividend Payout Ratio 

A lot of investors pay close attention to a company’s dividend payout ratio.   They want to know the percentage of a company’s profits that are being paid out as dividends. 

If this ratio gets too high, then either the dividend cannot grow at its past rate, or a dividend cut might be in the cards.  So for many investors, this is a telltale dividend safety metric. 

There are two widely accepted ways to calculate dividend payout ratios – either based on earnings or free cash flow.

1. Earnings Dividend Payout Ratio

The formula for the dividend payout ratio (based on earnings) is 

Annual dividend per share / annual earnings per share (EPS)

If a company has an annual dividend of $1.00 per share and an annual EPS of $5.00 then its payout ratio is 1.00/5.00= 20%. 

Remember, the other 80% of the earnings can be used for other company projects, paying down debt or share buybacks etc. 

Usually, you wouldn’t want a company to pay out any more than 60% of its earnings as dividends. Although, for strong blue-chip companies, you could make an exception if the number is a little higher.  For utility companies, you could accept a payout ratio of up to 75%.

REITs by definition have to pay out 90% of the earnings, but the best method to calculate their payout ratio is Adjusted Funds from Operations (AFFO):

Funds From Operations = annual dividend per share / adjusted fund from operations per share

2. Free Cash Flow Dividend Payout Ratio

The free cash flow dividend payout ratio = Annual dividend per share / free cash flow per share

If a company has a free cash flow per share of $2.00 and pays a dividend of $0.50, then the free cash flow payout ratio is 25%. 

The company can use the other 75% of its free cash flow for anything else that it wants to do.  

Free cash flow is a different way of measuring the profit of a company, as opposed to earnings. It is preferred by some investors because it represents the real cash profit of a business. You can find free cash flow on the cash flow statement.

What Makes Dividend Growth Investing Powerful?

Dividend Growth Investing Powerful

Dividend investing is powerful and can be an excellent strategy for the right type of investor.

However, you have to read a company’s annual reports and follow along with the businesses you own.

1. Dividends give you passive income. Each time that you purchase a dividend stock, you create another income stream for yourself. 

If you buy 25 shares of Royal Bank stock and you receive $4 a share annually per share, then you receive $100 in dividends each year. 

You do not have to do anything else. 

So, become a shareholder.  Get your slice of the profits as a dividend. 

That’s it.  Then repeat. 

All your hard work is done upfront through your research.   Once you have purchased the shares, you can sit back and relax.  If that isn’t passive, we don’t know what is.

2. Blue chip dividend growth stocks can generate price appreciation: As a company continues to pay out a higher dividend, more investors get attracted and start purchasing the stock.  This creates a situation where there are more buyers than sellers.  

This should cause the stock’s price to rise. 

But why does that happen? 

Suppose you own a blue-chip company stock that pays you $2 in dividends per share and it costs you $55 per share to buy.  That means the dividend yield is 3.63% when you buy it. 

Now suppose the company grows their dividend at a rate of 7% per year.  Ten years later, the dividend sits at $3.93 per share. 

If the price had stayed the same at $55 per share throughout the decade, the dividend yield would be 7.15%. 

Usually when a yield gets that high on a blue-chip company, something is amiss.  Or investor sentiment has soured on the stock or particular sector.

However, if the company is the leader in the industry, it would be tough to imagine the stock price staying stagnant for 10 years at $55.  Imagine the yield is 7.15% and investor sentiment is still favourable towards the stock.

Would the share price be logical? 

No.

Most likely the stock would have appreciated long before reaching a 7.15% yield.  A 7% + dividend yield on a best-in-class blue-chip stock would have been too enticing for investors to pass up.   

As mentioned before, the increased income from dividend raises attracts investors to the stock. It creates a situation where there are more buyers than sellers.  Whenever that happens, the stock price moves upwards. 

3. Dividend Reinvestments: You can choose how you want to handle the dividend payments that you receive.  One way to use your dividend payments is to reinvest them right back into purchasing more shares of the same company’s stock. 

If you are in Canada you can call your broker or fill out a form and state that you want to start dividend reinvestments for a few or all of your holdings in any account (such as your TFSA). 

Canadian brokerages typically offer a synthetic DRIP (Dividend Reinvestment Plan), so if you receive enough dividends to buy at least one full share, your broker will take your dividend money and purchase extra shares of a company for you at no charge.

If you do not have enough money to buy another full share, your brokerage will send the dividend cash amount to your account.   You can use those funds to purchase other investments when you have enough money saved up.

Suppose you own 100 shares of TD and you collect a dividend of $0.89 per share. You would receive $89 in dividends.  Now imagine that the price of TD’s stock is $89.

With a DRIP, you would reinvest the $89 dividend back into TD’s stock and purchase one extra share.  If you had 100 shares before the dividend, you would now own 101 shares.

Even if TD decides not the raise its dividend the next quarter, you would receive a dividend of $89.89 because you own 101 shares instead of the original 100 shares. 

If TD’s stock price was $89 still, the $89 in dividends is reinvested to buy another share and you would have 102 shares.

When quarter three comes around, you would receive $90.78 in dividends.  That is how you compound your wealth with dividend investing.

If you are an American, then your online brokerage might allow you to buy fractional shares which compounds your wealth quicker, because every cent is working hard for you all the time. 

If you own 100 shares of Pfizer’s stock (PFE) at $45 and you receive a dividend payment of $55 in one quarter, then you can buy 1.22 shares of Pfizer if you have a DRIP enabled.

If you had previously owned 100 shares of Pfizer, then after the DRIP took place you would own 101.22 shares.

The next time a dividend gets paid by Pfizer, you will receive dividends from 101.22 shares, not just your original 100 shares. 

It may not seem like a big deal to reinvest dividends at first, but if you refrain from using your dividends to buy goods and services, it can have a tremendous impact on your wealth.

Using a dividend calculator online, we performed a hypothetical situation where you owned 100 shares of a stock at $89, for an initial cash outlay of $8,900. 

The annual dividend was $3.56, and we set the dividend and stock price growth rates to be 5% per year for 20 years.

As you can see, without dividend reinvestments at the end of two decades, you would have the original 100 shares and a total portfolio value of $35,974.  Dividends accounted for $12,360 of that final value, and you would have an annual return of 7.23%. 

With dividend reinvestments, you would end up with 219.11 shares (over double), and a total portfolio value of $51,741.  Dividends would account for $19,558 of that final value resulting in an annual return of 9.2%. 

You receive 58% more dividends with reinvestments turned on.  One action netted you over $7,000 more in dividends and almost $16,000 more in total return, including capital gains. 

Astounding.

Div Reinvest
Source: Buyupside.com

To be clear, having a dividend reinvestment plan means you forego receiving a dividend cash payment.

4. You Get to Play a Different Game From Everyone Else 

When you begin dividend growth investing, your primary focus becomes income.  The total dividends you receive annually are your main metric to follow.  If your dividends are higher this year than the previous year, then your portfolio is trending in the right direction.

Of course, every investor would like to see price appreciation along with their increasing dividends.  

Remember, with non-dividend paying stocks, the only way you gain money is through selling a stock that has appreciated.  The problem is once you sell, you no longer own the asset. 

Psychologically, you may feel the need to look at the stock prices bouncing up and down more often with non-dividend stocks than you would with a dividend growth stock portfolio. 

With dividend growth stocks, your dividends are tangible and hit your account every quarter or month. Plus, you keep the asset in question.  This helps you hold on to your stocks when a stock market correction occurs.  You don’t care as much about the price of a stock, because your focus is on the growth of your dividends. 

While everyone else is focusing on unrealized capital gains and losses, you are focused on income received.  That makes a tremendous difference emotionally. 

Before you dismiss what I’m saying, realize that tracking income earned as opposed to the stock price is not a far-fetched concept. 

Anyone who purchases a Guaranteed Investment Certificate, deposits money into a high-interest savings account, or invests in bonds is mostly concerned about the interest payout that they will receive along with the safety of their capital.

While dividend growth stocks won’t protect your capital nearly as much as cash (nominally) and fixed-income assets will, they offer a bit more stability than other equity classes.

Comparing Your Dividend Growth Portfolio to the Index

Dividend investing changes your mindset and creates new rules for you to follow.  

A lot of investors that purchase individual stocks want to see that they “beat the market” return.  If the S&P TSX 60 or the S&P 500 makes a 7% gain one year, most stock pickers want to see if they can achieve a return of 7.1% or more. 

If you are not matching the market returns, then what’s the point of investing in individual stocks?   

Save time and effort.   Just invest in an index ETF and be happy to receive the market return less a small investment fee.

If your primary focus is trying to beat an index like the S&P 500, then dividend investing may not suit your goals.

As a dividend growth investor, your goal might be to build your dividend income up to cover your yearly expenses.  If your yearly expenses are $30,000 and you have a dividend portfolio that provides $30,000 in dividends, then that is all that matters. 

That’s the point that you reach financial independence.  The cherry on top is that even if you withdraw your dividends to help pay for your everyday expenses, you should still see growth in your dividends year after year.

Why?  

Because you hold dividend growth stocks.  The companies in your portfolio will raise their dividends each year, usually at a rate higher than inflation.  That means your portfolio will generate more income for you each year in the future.

When you are young, you may want to chase high-growth stocks to reach your financial goal of one million dollars quickly.  After you retire, you might think “I will switch over to dividend stocks”.  That may be easier said than done. 

The problem with switching over to dividend stocks at the point of retirement is that you would have a 100% equity asset allocation, which goes against conventional advice. This may make a non-experienced dividend growth investor nervous. 

The experts suggest that half your portfolio should be in bonds at that time. It’s hard to ignore that advice, and it is prudent to consider it.  

However, if you have been dividend investing for 20 years plus, then you would be accustomed to the process.  

If you have enough dividends to cover all your expenses at the time of your retirement, you would not even have to touch your principal.

How cool is that? 

Therefore, a market crash or correction would not have a huge effect on you as long as your companies kept paying the same amount of dividends as before. 

You would be comfortable with the companies you picked, and they would have proven to you that they are reliable and steady dividend payers.  Through the good and the bad times.  

This is a huge advantage over most retirees who have very little savings or who need to sell their shares of stocks and ETFs to produce income to live the retirement lifestyle they want. 

Dividend growth investors with a fairly sizable nest egg can produce tens of thousands in dividends per year if they have been following this strategy and investing money each year for a few decades. 

How Dividend Investing Works (Steps)

  1. Invest in quality blue-chip dividend growth stocks.
  2. Reinvest your dividends to buy more shares.
  3. Let your companies raise their dividends yearly, giving you an income boost.
  4. Save money over time and invest it in more dividend growth stocks to compound the process.

Building a Dividend Portfolio

Exchange-Traded Funds (ETFs)

It is very prudent and safer to build your dividend portfolio across various sectors and between Canadian and American stocks. This is called diversification. 

If you have less than $15,000, then you might consider investing in a dividend ETF.  Once your portfolio grows bigger and you learn more about individual stocks, you can decide if you want to pursue holding individual equities.  

Or you can become a hybrid investor and own some individual stocks and a couple of ETFs. 

In the Canadian market, some good dividend ETFs for you to consider are VDY, ZDV, XEI and XIU.  As usual, do your research to see which (if any) of the funds listed match your financial goals and investment style. 

On the American side, there are some great options for dividend ETFs such as VYM, VIG and NOBL.  

Individual Stocks

The key is to research your dividend growth stock picks.  The research you are doing here is mostly quantitative, and you’re going to focus on analyzing the company’s financial ratios, but the qualitative part is important as well. 

It would be best to read through financial statements in the annual report (10-K) and also go through any analyst reports that your online brokerage has on the company.  

The analyst reports will give you ideas that support a rosy, bullish future and reasons why you should be cautious about a bearish future. 

There is also a ValueLine service, which provides very handy one-page reports about the company’s recent news and a lot of the historical financial data that you’ll need in one handy PDF.  ValueLine may be free to access at your local library. 

Build Out Your Core Holdings

If you decide to hold individual stocks in your portfolio, then your core holdings should have well-recognized, large, mature S&P TSX 60 and S&P 500 companies. 

One key is to buy these core stocks at reasonable prices.  You may find five companies you want to invest in, but only two of the companies make sense from a valuation perspective. So purchase those first.

To qualify as a core holding, it has to be a company that you are confident in and not worried about how it will do in the short or long-term. 

The Three Types of Dividend Growth Stocks for Your Portfolio

While building your portfolio, you need to consider having a mix of the three types of dividend growth stocks.  They are low, average and high dividend-yielding stocks. 

These three types of dividend growth stocks help give your portfolio a good mix of income, stability, safety and growth.

  • A low-yield dividend stock has a starting dividend yield of less than 2% but a dividend growth rate of around 10%.
  • An average yield dividend stock has a starting dividend yield between 2.5% to 4.5% and a dividend growth rate between 5-8% per year. 
  • A High yielding dividend stock has a yield of 5% plus but the dividend may only grow between 2-4% each year. 

Each type has its pros and cons, but together they give you a much stronger portfolio. 

The Yield on Cost Metric: Your Money is Working Hard

Yield on cost is a metric that most investors dislike because when you purchase a stock, you buy it based on a stock’s current yield. Some investors consider it a “vanity” metric that is nice to know but doesn’t give you any real value.   

Yet, the yield on cost tells you how much you’re making from your dividend stock based on your cost basis (i.e. purchase price).  It’s a real marker that shows you how hard your money is working for you.  An example will help illustrate this concept.   

If you bought 100 shares of Fortis (FTS) in early February 2021 at $52 per share, you would have paid $5,200.  At that point in time, the current dividend yield was 3.89%.  

Fortis fits the definition of an “average yield, average dividend growth” stock.   

What would happen if we fast-forward through time?

When forecasting, you make assumptions.  We’ll assume Fortis continues growing its dividend each year since that’s what the company has done for 40+ years. 

If Fortis were to declare a 6% dividend increase every year for 20 years, then by February 2041, your yield on cost would be 11.77% as seen in the table below.  Your annaul dividends received would triple. 

YearFortis Dividend Annually ($)Yield on Cost
1 2023.89%
2 2144.12%
3 2274.37%
4 2414.63%
5 2554.91%
6 2715.21%
7 2875.52%
8 3045.85%
9 3226.20%
10 3426.57%
11 3626.97%
12 3847.38%
13 4077.83%
14 4318.30%
15 4578.79%
16 4859.32%
17 5149.88%
18 54510.47%
19 57711.10%
20 61211.77%

As you can see in the first year you would have received $202 in dividends.  

It would take you 8 years to climb to over $300 per year in dividends, at which point your original investment would earn almost 6% in dividends per year on its own. 

In year 13, you would cross $400 in dividends per year, and then in year 17, you would earn $500 in dividends annually before finally ending with $612 in dividends per year after twenty years. 

Here are the number of years that it took you to make an extra $100 in dividends per year, remember back in year 1, you would have made $202. To go from:

  • $200 to $300 in dividends per year, it took 7 years
  • $300 to $400 in dividends per year it took 5 years
  • $400 to $500 in dividends per year it took 4 years
  • $500 to $600 in dividends per year it took 3 years

You may notice that it took you 7 years (from years 1 to year 8) to gain the initial $100 increase in dividends per year.  However, to jump from $300 to $600 in dividends annually took only 12 years. 

What does this show?

The magic of compounding interest over a long time horizon.    

The longer the time frame you have, the more magical compounding becomes.  Compounding accelerates exponentially around the 15-year mark in this example.   At that point, your money works much faster and harder for you than it did in the earlier years.     

Dividend Growth Stocks vs Fixed Income Assets 

Bonds are fixed-income assets because the income generated from the interest payments stays fixed throughout the entire investment period. 

If you buy a five-year government bond that yields 3% the income you receive stays fixed for five years.  If you put $5,200 into a government bond you would yield $156 in interest income for each of the five years.

Then you would have to purchase another bond after five years, at the prevailing interest rate. Your next bond purchase could have an interest rate of 1% or 10% depending on the state of the economy.  

If your new bond purchase offers you 3% or less, then you haven’t seen your income grow. 

Over the initial five years, you earn $780 plus you get your $5,200 back.  With government bonds, your initial capital is certain to be protected.  The one incredible advantage of fixed-income investments is that your capital is much safer than with any single dividend stock.                         

With Fortis, you would earn $1,139 in dividends over the first five years.  However, you would not be sure whether the stock price would be up or down at the end of that timeframe.  You make more income with Fortis than the income of a bond, but your capital is always at risk.

This is the classic risk vs reward trade-off. 

If you want a higher investment return, you need to pick an asset class (like equities) that is riskier and won’t protect your capital like a safer asset class such as fixed-income, would. As a result, fixed-income rates of return are usually a lot lower than equity return rates.  

Fortis is not a penny stock, nor is it a new company bursting on the scene.  Stocks are risky overall, but Fortis is a safer stock than most others. In fact, mature, blue-chip, dividend growing companies are as safe as you can get with individual equities. 

The beauty of yield on cost, though, is that it shows how hard your dividend stocks are working to make money for you while you watch Netflix for 20 years. 

Fifteen years from now, it would seem rather unlikely you could receive 8.79% on a new five-year bond purchase.  Looking at the table, you see that your Fortis purchase would yield 8.79% at that time, if all the assumptions for this scenario held true.  

Calling Fortis an average dividend growth stock does not mean that it is not capable of extraordinary things.  Average signifies that Fortis is a dependable dividend stock that offers both a decent starting yield and a moderate dividend growth rate. 

US Dividend Growth Stocks: Adding Growth and Lowering Overall Risk

Five months into 2022 and dividend yields are low for a lot of the blue-chip dividend growers in the US.  

US dividend growth stocks will give you a lower starting yield, but usually, they grow their dividend faster than their Canadian counterparts (which usually have higher starting yields).  

More importantly, US dividend growth stocks offer a lot of international exposure because they have business operations in the US and all around the world.

Think about all the countries that Pepsi, Microsoft, 3M, Starbucks, Apple and Procter & Gamble operate in. 

After all, you wouldn’t want 100% of your dollars tied to the Canadian economy, or any single market, because that increases the risk in your portfolio. 

Purchasing US stocks means you will have to deal with the unfavourable exchange rate, as the American dollar is usually 20% to 30% more expensive in value than the Canadian dollar.

However, while the exchange rate is unfavourable to Canadians right now, don’t forget that any dividends received will be in American dollars.  If the exchange rate is favourable, you can always convert your dividends back into Canadian dollars whenever you need them. 

Where Should You Hold Your US Dividend Stocks?

If you are a Canadian investor, then you could consider holding your US dividend growth stocks in your RRSP or in a non-registered account.  

The Internal Revenue Service (IRS) which is the tax arm of the US government, does not view your TFSA as a retirement account. 

As a result, you lose 15% of your US dividends to an IRS withholding tax for holdings in your TFSA. Keep in mind that this only applies to the dividends and not the capital gains of the particular dividend stock.

If you hold your US dividend growth stocks in an RRSP, you will receive 100% of the dividend because of a tax treaty Canada has in place with the US.  That is why most investors recommend an RRSP as the place to hold your US dividend growth stocks.  This is an example of asset location – knowing which accounts to use to hold for different asset classes.   

Dividend Growth Investing Conclusion

Dividend growth investing is very different than investing in ETFs or growth stocks. Now that you have a comprehensive guide, here are a few outside resources to help you find data.

Use Dividend Calendar to find out when each company you hold is going to pay their dividend.

Use Dividend History to see dividend calendars and dividend increase/decrease announcements. 

If you’re an experienced dividend growth investor, what are some tips you have about starting a dividend growth portfolio? Are there any dividend metrics you pay attention to that weren’t mentioned here?

Dividend Growth Investing FAQs

What is a good dividend yield?

A good dividend yield for a company is between 2.5% and 4.0%. That gives you as an investor a moderate to high current income, while leaving room for future dividend growth.

What is a good dividend growth rate?

A good dividend growth rate is between 5 to 8% annually. That will handily beat inflation in most years and can compound quick enough that after 20 years you could reasonably expect a blue-chip company’s annual dividend to double or triple.

How do you choose dividend growth stocks?

Look for mature, blue-chip companies that are market leaders, have strong free cash flow and a history of dividend growth (at least 8-10 years). Also look for companies that show increasing revenue and earnings amounts and lower debt-to-equity ratios.

How much do I need to invest to make $500 a month in dividends?

You will need $200,000 earning a dividend yield of 3% annually to make $6,000 annually, or $500 per month in dividends. That’s if you do a lump sum investment.

If you have been dividend growth investing for a long time you will need considerably less as the companies you invest in will raise their dividends each year without you doing anything.

Related Articles

If you want to up your dividend investing knowledge, here are some important articles to check out:

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