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Maximize Your Returns with These 6 Tips for Finding Dividend Growth Stocks

By Kristoff De Turck

Last update: Feb 7, 2023

Investing in stocks can be a great way to grow your wealth over time, especially if you choose stocks that pay dividends. A growing dividend can provide a steady stream of income, in addition to the potential for capital appreciation. But how do you find stocks with a growing dividend? In this article, we’ll discuss a few tips that can help you identify such stocks.

Avoid the ‘high dividend yield’-trap

Don't be easily seduced by companies that pay extremely large dividends. Some mature companies with stable earnings and plenty of cash certainly have the ability to offer relatively high dividend yields but always check carefully that you are indeed dealing with such a quality company. Otherwise, the risk is significant that you will soon be faced with a significant dividend cut.

Dividend Yield Filter

Don't be tempted by too extreme dividend growth

The reason for choosing "only" moderate dividend growth has the same logic as avoiding too high a dividend yield. There is little point in picking such dividend stocks if the pace of dividend growth is difficult to maintain. Remember, as an investor, you want to benefit from stable dividend growth for as long as possible.

dividend growth rate filter

Look for Companies with a History of Increasing their Dividends

Look for companies that have a history of increasing their dividends. Companies that have consistently increased their dividends over the past several years are likely to continue doing so in the future. This can be a good indicator of future dividend growth and stability.

In ChartMill, use the 'dividend increase years' filter for this purpose. This allows you to set the number of consecutive years that the company continuously increased its dividend. The higher, the more reliable the future dividend becomes.

dividend increase years filter

Consider the Company's Financials

The financial strength of a company is important in determining its ability to pay and increase its dividends. When evaluating a company’s financials, look at its earnings, revenue, and cash flow to ensure that they are strong and growing. Companies with strong financials are more likely to have the resources to pay and increase their dividends.

You can consult these figures in detail by opening the financials tab on the company's profile page. Revenue data and cash flow can easily be found via the income statement and cash flow tab. The thumbnail charts instantly give you a first impression of the trend of these figures.

financials cash flow

Analyze the Dividend Payout Ratio

The dividend payout ratio measures the proportion of a company's earnings that are paid out as dividends. A low payout ratio can indicate that a company has room to increase its dividends in the future.

On the other hand, companies with a high payout ratio may have limited financial flexibility, as a significant portion of their earnings is already committed to dividend payments. This may make it difficult for the company to reinvest in its business or to cope with unexpected expenses which increases the likelihood that the dividend will have to be cut.

A healthy payout ratio varies depending on the industry, type of business, and financial stability of a company. Generally, a payout ratio between 40% to 60% is considered healthy, as it provides the company with enough financial flexibility to reinvest in its business, handle unexpected expenses, and weather economic downturns.

For some industries, such as utilities, for example, a payout ratio higher than 60% may still be considered healthy because these companies typically have more stable revenues and steady demand for their products or services.

dividend payour filter

Research the Industry

The stability and growth potential of the industry in which a company operates can also impact its ability to pay and increase its dividends. Companies in mature industries, such as utilities, consumer staples, healthcare, and telecommunications, are more likely to have the financial resources to increase their dividends. So, it’s important to consider the overall outlook for the industry when evaluating a stock. Typical growth stocks are more likely to invest their profits in the company itself for continued growth.

In conclusion

Finding stocks with growing dividends can be a great way to generate income and grow your wealth over time. By following the tips above, you can identify companies with a strong track record of dividend growth and the financial stability to continue dividend growth into the future. With the dividend filters available in ChartMill, you have a powerful tool that will pull up a fine selection of attractive dividend stocks in just a few clicks.

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