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3 Reasons it’s a 3-Way Win to Buy Dividend-Growth Stocks

If investors buy quality dividend-growth stocks at reasonable or discounted valuations, essentially, they win over the long term.

Dividend-growth stocks let you earn a growing income. The longer you hold the shares, the more income you receive, as long as the companies become more profitable over time and maintain the culture to grow their dividends.

Growing dividends will push the share prices higher. After all, we don’t see outrageously high yields in dividend-growth stocks for long.

When stocks become attractively priced, investors can use the dividends to buy more shares. The more shares you accumulate, the more income you will get in the future.

Get a growing income from growing dividends

Here’s an example with Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN). The North American utility is a rising dividend-growth star. It has hiked its dividend for six consecutive years.

Algonquin has $10 billion of total assets, which provide rate-regulated utility services to more than 782,000 U.S. customers, have more than 2,500 MW of power-generating facilities, and consist of rate-regulated electric transmission and natural gas pipeline systems.

These assets, along with its five-year growth plan, support a growing dividend of 10% per year in the next few years.

dividends

Growing dividends imply higher share prices

Algonquin shares are almost 130% higher than they were six years ago when the company started growing its dividend. In the same period, its dividend grew almost 52%.

On a side note, Algonquin started paying a U.S. dollar–denominated dividend in mid-2014. So, its dividend has actually grown 100% in six years.

This is the power of compounding. Investors would have already doubled their income from Algonquin by buying its shares a mere six years ago!

For a utility, rising operating cash flow per share over time while maintaining industry-matching debt ratios is a good indicator that it has been growing its dividends in a healthy way.

That’s the case for Algonquin; its dividend growth has been supported by rising operating cash flow per share over multiple years.

Use dividends to buy more shares

Dividend investing is a defensive strategy in that investors can get a positive return even in a down market. Dividends can help investors to hold on to their shares in a market crash and to buy more shares when stocks are attractive.

Conclusion

By buying a portfolio of dividend-growth stocks at reasonable or discounted valuations, you will win over the long run, even if one or two end up cutting their dividends.

It just so happens that Algonquin is reasonably priced today. It starts you off with a yield of 5.1%, which would otherwise be a yield of 4.4% if the currency conversion were US$1 to CAD$1.20.

Growing dividends allow you to earn a higher income over time. Additionally, your shares will also become more valuable (and go higher) over time as they earn more income.

Lastly, when stocks become attractively priced, especially during a market crash, you can use your dividends to buy more shares for more future income.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of ALGONQUIN POWER AND UTILITIES CORP.

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