The case for dividend growth stocks

Many investors focus on yield alone when looking for income, that’s a mistake says Rupert Hargreaves. It’s the potential for dividend growth that really matters.

Buying a portfolio of dividend champions like Coke is a good way to build a dividend growth portfolio, but, as I noted at the beginning of this article, investing is hard and picking stocks is even harder. That’s why I’d choose to go with a fund specialising in quality income stocks. On the passive front, there’s the SPDR® S&P US Dividend Aristocrats ETF listed in both pounds and US dollars. There’s also the SPDR® S&P UK Dividend Aristocrats ETF (UKDV). Then on the active side, there’s a range of investment trusts that fit the bill. Finsbury Growth & Income (FGT) has a focused portfolio of businesses that dominate their respective sectors, with pricing power and robust cash flows to support their dividends. STS Global Income & Growth (STS) has a wider, more international portfolio of income plays. A little over a third of the portfolio is invested in the UK, with 56% invested in US equities. Scottish American Investment Company (SAINTS) has less exposure to the US (35%) and its largest holding is Novo Nordisk. It also has a small allocation to corporate bonds and infrastructure trusts. JPMorgan Global Growth & Income (JGGI) has by far the best track record when it comes to creating value for investors. It targets a dividend of 4% of capital each year, funded with both capital gains and income, so it doesn’t focus purely on income stocks. It can buy growth stocks as well and trims these holdings to fund its dividends. A truly growth-focused fund with income as a second thought.
(Image credit: Getty Images)

What’s the better investment, growth stocks or dividend stocks with high dividend yields? It’s the age-old question, but why should investors have to choose? An alternative option, one that combines the best of both worlds, is to look for the market’s best dividend growth stocks.

This approach merges the benefits of seeking out growth stocks with robust cash flows, which will underpin further growth and shareholder returns. 

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Rupert Hargreaves
Contributor and former deputy digital editor of MoneyWeek

Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.

Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.