Dividend Income Versus Dividend Growth

So which is better: stocks that pay a modest dividend but offer the promise to grow that dividend in the future, or stocks that pay out most of their earnings as dividends with seemingly little potential for growth? There are pros and cons to both approaches. Dividend growth companies are often higher quality with disciplined managers focused on stable dividend growth. The ability to increase dividends through thick and thin suggests a management culture very concerned about protecting and growing dividends.

This is a good signal for future growth, as it keeps managers focused on allocating capital wisely. Warren Buffet is widely known as a dividend growth investor. A counterargument is the fact that while growth sounds appealing, that growth is often priced into the value of the stock. Additionally, the current economic environment is characterized as having low growth, so reinvested dividends may not earn high rates of return.

Source: Morningstar

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