Tips For Dividend Growth Investors

It has been suggested that TIPS-Treasury Inflation-Protected Securities-are a better choice for dividend growth investors than dividend stocks themselves. The reasoning is that in periods of high interest rates, the income from TIPS will keep up with inflation, while the annual growth in dividends of dividend growth stocks will not. The income advantage of dividend growth stocks over the past few years is dismissed as "recency bias."

At the current time, TIPS cannot touch dividend growth stocks in initial yield. It would take a sizable increase in interest rates for TIPS to become competitive with dividend growth stocks in yield. Since my focus in dividend growth investing is on the income stream, this is pretty much a knockout factor for me. It is realistic for me to put together a dividend growth portfolio with an initial yield of around 4% and a likely annual dividend growth rate that places a goal such as 10 by 10-10% yield on cost within 10 years-in reach. You simply can't do that with TIPS. As we saw in the example above, even a TIPS that began with a decent interest rate of 3% 10 years ago has a yield on cost now of less than 4%. While that cash flow has been protected from inflation, it has also been constrained by inflation.

Source: Seeking Alpha

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