Dividend Investing? Buy Growth, Not Yield

Dividend income is an important element of total return. But nicely yielding stocks are perceived as being at risk in a rising rate environment. What should the income-dependent investor do in this current climate of rising interest rates? Argus recommends focusing on dividend growth over dividend yield. Specifically, we would focus on persistent dividend growers - companies that have boosted their dividend for many years consecutively - and companies that have an above average rate of dividend growth.

We would scour for dividend growth in sectors outside the traditional equity-income areas of utilities, REITs, and MLPs. And for all names, we would track some measure of dividend safety; our favorite is cash flow coverage or free cash flow coverage of dividends. Dividend growth is not an ironclad defense against a down market. But for investors requiring income, dividend growth outperforms in a rising rate environment. In our view, dividend growth is a superior strategy in relation to chasing high yield for long term returns across the entire market cycle.

Source: Seeking Alpha

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