Don't Be Misled By Dividend Growth

Dividend growth can be misleading. High dividend growth may not result in the income steam you expect and low dividend growth expectations may also be incorrect. The purpose of this article is to shed some light on this potential anomaly. Imagine you are back in the year 2002 looking for a stock that has at least 10 years of dividend growth. Brady Corp. (NYSE:BRC) catches your eye with a forward dividend yield of 2.17%, which has growth over the past 5 years at an annualized rate somewhere between 14%-19%. You have a friend who only invests in utilities. He encourages you to buy American States Water Company (NYSE:AWR). The capital returns in AWR are over twice that of BRC. What went wrong?

Dividend growth, or any growth for that matter, can be deceiving. While growth might look outstanding based on the starting dividend size, how significant is that growth based on the dollars you have invested? How persistent will that growth be going forward? My studies so far indicate that investors overvalue high dividend growth while undervaluing low dividend growth. Because high payout ratios also correlate with higher performance in this dividend growth universe, investors may be placing too much emphasis on reinvestment of profit.

Source: Seeking Alpha

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