Long-Term Wealth Creation Needs Dividend Growth

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When you are planning for retirement or when you are putting money away for the long term, a crucial element to consider when choosing your investments is the power of compounding, and the power of consistent dividend growth.

When you buy a stock that pays a dividend, it’s not so important that the company pays a large dividend now. In fact, a company that pays a large dividend now is probably spending too much money on dividend payouts and not enough money on expanding its business. While high dividends look enticing, you need to be careful.

However, when a dividend is low, don’t simply dismiss it as a potential income stock. Keep in mind that as a long-term investor, you shouldn’t be concerned about income today. You are concerned about income at least 10-15 years from now. So when you pick your stocks for their income potential, you need to prepare with this in mind.

The key to doing so is to pick stocks that are consistently growing their dividends significantly. Consider two scenarios. The first company pays a 4 percent yield and raises its dividend 5 percent per year. In 15 years, this company is going to roughly double its dividend payout so that the yield you will receive on your initial investment is 8 percent.

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