Why Dividend-Growing Stocks Are Better Than High Dividend-Yielding Stocks

Dividends have long been the focal point for income-focused investors. They offer consistent payouts from investments and can serve as a reliable income stream, especially for retirees. Two types of dividend-paying stocks are particularly popular: high dividend-yielding stocks and dividend-growing stocks. While the former may seem more attractive at first glance due to their generous yields, the latter often presents a more compelling long-term opportunity. In this article, we'll delve into the reasons why dividend-growing stocks may outshine their high-yielding counterparts.

Sustainability of Dividends

• High Dividend-Yielding Stocks: Stocks that sport high dividend yields may not always be sustainable. A high dividend yield can sometimes result from a falling stock price, which may indicate underlying problems in the company. If a company is struggling with its core operations or facing headwinds in its industry, it may cut or eliminate its dividend in the future.

• Dividend-Growing Stocks: These are stocks where the company regularly increases its dividend. A company that consistently grows its dividend is often one with strong financial health and a positive outlook for future earnings. The consistent growth of dividends indicates management's confidence in the company's future and its commitment to returning capital to shareholders.
  

Capital Appreciation Potential

• High Dividend-Yielding Stocks: While these stocks offer a higher immediate yield, they often have limited capital appreciation potential. Companies paying out a large portion of their earnings as dividends may not be reinvesting sufficiently into the business to fuel growth.

• Dividend-Growing Stocks: Companies that steadily increase dividends often see steady stock price appreciation. This is because dividend growth usually indicates a healthy, growing business. Over time, this can result in significant total returns (capital appreciation + dividends) for investors.

Inflation Protection

• High Dividend-Yielding Stocks: A static high dividend does not offer protection against inflation. Over time, the purchasing power of the dividends can diminish if they do not grow.

• Dividend-Growing Stocks: One of the significant advantages of dividend-growing stocks is that the rising dividend can help offset the erosive effects of inflation. As dividends increase, they preserve – and can even enhance – the purchasing power of the income received.

Sign of Business Quality

• High Dividend-Yielding Stocks: A high dividend yield alone does not signify a quality business. As previously mentioned, a high yield might be due to a declining stock price, hinting at issues with the company.

• Dividend-Growing Stocks: Regularly increasing dividends are often a hallmark of well-run companies with durable competitive advantages. Such companies generate steady free cash flow and have the confidence to share an increasing portion of their profits with shareholders.

Reinvestment Opportunities

• High Dividend-Yielding Stocks: The high immediate income might discourage some investors from reinvesting their dividends, opting instead to spend the payouts.

• Dividend-Growing Stocks: The power of compounding becomes evident when dividends are reinvested, especially with dividend-growing stocks. As dividends increase and shares are purchased with those growing dividends, the potential for exponential wealth growth over time is significant.
  

Tax Considerations

• High Dividend-Yielding Stocks: In many tax systems, dividend income is taxed differently than capital gains. High dividend yields might expose investors to higher immediate tax liabilities.

• Dividend-Growing Stocks: Investors in dividend-growing stocks might benefit from a combination of capital appreciation (often taxed favorably as long-term capital gains) and gradually increasing dividend income. This mix can be more tax-efficient in certain jurisdictions.

Summary

While high dividend-yielding stocks have their place in an income-focused portfolio, especially for those seeking immediate cash flow, dividend-growing stocks often present a more balanced opportunity for both income and growth. Through a combination of sustainability, inflation protection, and the potential for capital appreciation, these stocks can offer long-term investors a compelling case for inclusion in diversified portfolios.

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Investment Disclosures

​This material is not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

The views expressed are the views of Infinitus Wealth Management, LLC. These views are subject to change at any time and may not represent the views of all portfolio management teams, Wealth Advisors, or other Investment Professionals. These views should not be interpreted as a guarantee of the future performance of the markets, any security, or any funds managed by Infinitus Wealth Management, LLC. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Investment Advice will be given to individual clients based on risk tolerance, time horizon, investment objectives, and other considerations.

Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Local, regional, or global events such as environmental or natural disasters, war, terrorism, pandemics, outbreaks of infectious diseases, and similar public health threats, recessions, or other events could have a significant impact on investments. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

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