Have you ever thought of ways to supplement your incomeThe income statement provides a summary of a company's revenue and expenses over a specified period of time, typically a year or a quarter. It shows the company's total revenue, th...? Investing in dividend growth stocks is one way to do so. Dividend growth stocks provide investors with a steady stream of passive income. While it is not a get-rich-quick scheme, it is a smart way to build long-term wealth. This article will explain what dividend growth stocks are and provide insight into how to invest wisely in this asset class with 4 dividend growth stock picks.

Goldman Sachs recently released a report that favors dividend stocks over companies that prioritize share buybacks. Goldman’s chief U.S. equity strategist David Kostin wrote, “The difference in outlooks for dividend and buyback growth suggests firms focusing on dividends will continue to outperform buyback stocks,” Kostin wrote. David Kostin noted that S&P 500 dividends grew by 8% year over year in the first quarter of 2023 while buybacks dropped by 21% year over year in the fourth quarter, with companies likely to further slowdown in the first and second quarter.

What Are Dividend Growth Stocks?

Dividend growth stocks are stocks that offer regular quarterly dividend payments to shareholders. These stocks are usually large, well-established companies with steady income from their core business operations. The dividend payments are usually part of a plan to reward shareholders for their loyalty.

When a company declares a dividend, the amount of money you receive is the same as it was before. But each quarter, the company may increase the dividend payment, meaning the amount of income you receive grows. This is why these types of stocks are referred to as “dividend growth stocks.”

Advantages Of Dividend Growth Stocks

There are several advantages to investing in dividend growth stocks. First, you can receive a steady stream of income from the dividend payments. This income can help supplement your other income sources and provide you with financial stability.

Second, the stock’s value can appreciate over time, providing you with capital gains. This can amplify the returns on your investment and help you build wealth.

Third, the dividend payments are generally taxed at a lower rate than other forms of income. This means more of your profits can be retained, allowing you to maximize your returns.

How To Choose The Right Stocks

When investing in dividend growth stocks, it’s important to do your research. Here are some tips for choosing the right stocks:

Understand the company’s business model and financials: Evaluate the company’s financial statementsFinancial statements are the primary tool used by investors to evaluate a company's financial health. They are an important part of a company's reporting, providing a snapshot of i... and ensure that the company is profitable and has a solid balance sheetThe balance sheet is a snapshot of a company's financial position at a specific point in time. It shows the company's assets, liabilities, and equity..

Look for dividend yield and dividend growth: Look for stocks with a strong dividend yield and a history of increasing dividend payments.

Diversify your holdings: Don’t put all your eggs in one basket. Spread your investments across different sectors and companies.

Consider The Risks

Even with careful research, investing in dividend growth stocks carries some risks. Here are some of the risks to consider:

Stock Price Risk: The stock price can drop, resulting in capital losses.

Interest Rate Risk: Rising interest rates can make dividend stocks less attractive and lead to a drop in stock price.

Dividend Risk: Companies can cut or eliminate their dividend payments.

Tax Risk: Dividend payments may be subject to unexpected changes in tax rates.

Focus On Quality

When investing in dividend growth stocks, focus on quality. Investing in well-established, high-quality companies can help reduce your risk and provide you with steady income. Look for stocks with strong fundamentals, such as a solid balance sheet, strong cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves..., and a history of increasing dividends.

Growth Strategies

When investing in dividend growth stocks, it’s important to have a growth strategy. Here are some tips for growing your portfolio:

Set Investment Goals: Decide what your goals are and how you plan to achieve them.

Diversify Your Holdings: Spread your investments across different sectors and companies.

Reinvest Your Dividends: Reinvesting your dividends can help you grow your portfolio faster.

Rebalance Your Portfolio: Regularly review your portfolio and make adjustments as needed.

Tax Planning

Tax planning is an important part of investing in dividend growth stocks. Dividend payments are usually taxed at a lower rate than other forms of income. However, it’s important to understand the tax implications of your investments and plan accordingly.

4 Dividend Growth Stock Picks

Home Depot shares are down this year, but the retailer has a 2.9% dividend yield. Analysts forecast HD will raise its dividend 10% a year over the span from 2023-2024.

Lowe’s has a 2.1% dividend yield, and analysts forecast 30% annual compound dividend growth over 2023-2024. Wells Fargo analyst Zachary Fadem wrote in a research note on April 14, 2023, that Lowe’s is a good way to play rising global temperatures. “We overlaid weather data against LOW’s pre-pandemic comps and the results were what we’d expect —Q1 comps tend to be ~200bps higher in years with above average temperatures,” Zachary Fadem wrote.

Fastenal shares are up 12% this year, and the industrial supplies company has a 2.6% dividend yield. Analysts see a dividend growth rate of 11% annually during 2023-2024.

NetApp has a dividend yield of 3%, and the price of this cloud storage stock is up 12% this year. Analysts forecast an annual dividend growth of 3% from 2022-2024.

Conclusion

Dividend growth stocks are an attractive investment option for those looking to supplement their income with a steady stream of passive income. They provide the potential for capital appreciation and tax advantages. However, it’s important to do your research and understand the risks before investing. By focusing on high-quality stocks and developing a growth strategy, you can maximize your returns and build long-term wealth.

Frequently Asked Questions

Q1: What are dividend growth stocks?

A1: Dividend growth stocks are stocks that offer regular quarterly dividend payments to shareholders. These stocks are usually large, well-established companies with steady income from their core business operations.

Q2: What are the advantages of investing in dividend growth stocks?

A2: The advantages of investing in dividend growth stocks include a steady stream of income, the potential for capital appreciation, and tax advantages.

Q3: How should I choose the right stocks to invest in?

A3: When investing in dividend growth stocks, it’s important to do your research. Evaluate the company’s financial statements and look for stocks with a strong dividend yield and a history of increasing dividend payments.

Q4: What are some of the risks to consider when investing in dividend growth stocks?

A4: When investing in dividend growth stocks, there are risks to consider such as stock price risk, interest rate risk, dividend risk, and tax risk.

Q5: What are some growth strategies for dividend growth stocks?

A5: When investing in dividend growth stocks, it’s important to have a growth strategy. These strategies include setting investment goals, diversifying your holdings, reinvesting your dividends, and rebalancing your portfolio.

Q6: How important is tax planning when investing in dividend growth stocks?

A6: Tax planning is an important part of investing in dividend growth stocks. Dividend payments are usually taxed at a lower rate than other forms of income, but it’s important to understand the tax implications of your investments and plan accordingly.

Q7: What are the benefits of focusing on quality when investing in dividend growth stocks?

A7: Investing in well-established, high-quality companies can help reduce risk and provide you with steady income. Look for stocks with strong fundamentals, such as a solid balance sheet, strong cash flow, and a history of increasing dividends.

Q8: What are some tips for doing research when investing in dividend growth stocks?

A8: When investing in dividend growth stocks, it’s important to do your research. Evaluate the company’s financial statements and ensure that the company is profitable and has a solid balance sheet. Also look for stocks with a strong dividend yield and a history of increasing dividend payments.