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Happy Monday!

With all the talk about recessions, inflation, and stock market volatility, it’s easy to feel overwhelmed about where the economy is heading. That said, it’s important to take a step back and focus on the long-term.

I’m sticking to my tried-and-true strategy: dividend growth investing. Today, I’ll share why this strategy will be successful and how it’s helping me build a stable and growing income stream, regardless of market conditions.

Let’s do this!

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The Key Story

Why Dividend Growth Investing Wins

The long-term growth of the stock market is tied to the economic growth of the individual businesses which make it up.

Learning from Warren Buffett

One of the key lessons from Warren Buffett’s long investing career, is to focus on the reality of individual businesses.

According to Buffett, at any point in history—even when stocks were screaming bargains—you could always find reasons to believe the future was bleak. His focus has always been on the productivity of businesses, not the noise around macro factors.

Why Great Businesses Pay Dividends

A high quality business is, by definition, highly profitable. Profits are the fundamental component of how investments are valued.

To pay a consistent & growing dividend, a company must be highly profitable. You can’t be a dividend growth stock without a rock-solid business model.

A strong dividend policy is often a signal of a quality business. In fact, dividend growth stocks have historically far outperformed with less volatility.

There are many great businesses, which do not yet pay dividends. However, there are few that don’t have the capacity to pay dividends.

Identifying Dividend Growth Stocks

Not every company will continually thrive, even during a recession, but many strong businesses do.

For instance, Dividend Aristocrats—companies that have increased their dividends for at least 25 consecutive years—stand out. Examples include PepsiCo, McDonald's, Coca-Cola, Procter & Gamble, Lowe’s, and Johnson & Johnson. These companies have continued growing dividends despite economic changes for decades.

In addition to these stalwarts, I believe companies like Microsoft, Apple, Visa, Mastercard, and Broadcom are future Dividend Aristocrats.

Even Big Tech giants like Google, Meta, and Salesforce just initiated quarterly dividend payments. It remains to be seen if they choose dividend growth, but they have very strong cash flows.

How I Find Dividend Growth Stocks

I built a research tool, dividenddata.com, to analyze the quality of a stock. It contains all the financial data needed, displayed with clear visualizations and tables, to easily determine the quality of the business.

Here are 3 key Financial Metrics to look for:

1. Dividend Growth Rates

Look for companies with a reliable pattern of dividend payments. The compound annual growth rate (CAGR) of the dividend is crucial. It shows how fast a payment is growing. This is often shown over 1, 3, 5, and 10 years.

2. Payout Ratio

The payout ratio shows the percentage of a company’s earnings being paid out as dividends. This shows how sustainable a dividend payment is. Consistently over 100% is not sustainable. On DividendData.com, I built another payout ratio metric based on free cash flow. In my opinion, that is a more reliable metric.

3. Free Cash Flow (Earnings)

Ultimately, a business and it’s dividends will only grow at the rate of it’s profitability. Free cash flow is the ultimate measure of profits.

You want to look for reliable high free cash flow, growing consistently over time. Growing free cash flow will fuel dividend growth.

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Recent Dividend Increases

LRCX Grows 15%, VICI up 4.2%, and Keurig Dr Pepper Increases 7%, etc

• $KDP - Keurig Dr Pepper declares $0.2

  3/share quarterly dividend, 7% increase from prior dividend of $0.21.

• $O - Realty Income declares $0.2635/share monthly dividend, 0.2% increase from prior dividend of $0.2630.

• $VICI - VICI Properties declares $0.4325/share quarterly dividend, 4.2% increase from prior dividend of $0.4150.

• $VZ - Verizon declares $0.6775/share quarterly dividend, 1.9% increase from prior dividend of $0.6650.

• $LRCX - Lam Research declared $2.30/share quarterly dividend, 15% increase from prior dividend of $2.00.

• $NJR - New Jersey Resources declares $0.45/share quarterly dividend, 7.1% increase from prior dividend of $0.42.

• $HES - Hess declares $0.50/share quarterly dividend, 14.3% increase from prior dividend of $0.4375.

Thanks for the read! Let me know what you thought by replying back to this email.

— Zach

Disclaimer: Dividend Dividend (Dividend Data LLC) is not a professional financial service. All materials released from Dividend Data (Dividend Data LLC) are for educational and entertainment purposes. Dividend Data (Dividend Data LLC) is not a replacement for a professional's opinion. Contributors to the Dividend Data (Dividend Data LLC) might have equities mentioned in the newsletter