Dividend Stocks: What’s Better? Growth or Consistency?

Are you thinking of investing in dividend stocks? Are you struggling to figure out if growth is better than consistency? Here’s my take!

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Investing in dividend stocks is a very popular strategy among Canadians. That’s because doing so could help Canadians supplement their primary source of income. In doing so, Canadians can more freely live their lives, doing things they want to do. Whether it be working less to travel more, spend more time with their family or on hobbies, or even retire early.

Although dividend stocks are often perceived as being safer than growth stocks, choosing the right ones to hold in a portfolio could still be tough for many investors. For example, what qualities should matter the most when looking for dividend stocks to hold in a portfolio? Well, there are two main qualities to consider. First, is a company able to grow its dividend year after year? Second, does a company have a long history of paying shareholders?

If you focus on those two qualities, I believe you could do well in choosing good dividend stocks to hold in your portfolio. However, to make your search even easier, I’ll narrow it down to the single most important quality that investors should focus on: dividend growth.

Dividend growth is very important to consider because a stagnant dividend could lead to a loss in buying power over time. The long-term inflation rate is about 2%. That means investors should look to hold dividend stocks that have a growth rate of at least 2%. By focusing on those companies, investors should be able to stay ahead of inflation and reap the benefits of a strong dividend portfolio.

We have a term for stocks that have a history of raising dividends

Did you know that there’s even a term given to elite stocks that have a strong history of raising dividends? Those companies are known as Dividend Aristocrats. It’s important to note that the requirements to become a Dividend Aristocrat can vary from country to country. For example, in Canada, these are companies that have increased their dividends for five years in a row. However, in the United States, Dividend Aristocrats have increased their dividends for 25 years or more.

If I could only invest in one Canadian dividend stock for the rest of the year, it would be Fortis (TSX:FTS). In Canada, there are only 12 stocks that have dividend-growth streaks long enough to be also listed as Dividend Aristocrats in the United States (assuming they’re also listed on an American stock exchange). However, Fortis stands so far ahead of most of those other stocks.

This company maintains a 50-year dividend-growth streak. To put that into perspective, consider that the next longest dividend-growth streak is nearly two decades shorter than Fortis’s. In addition to that strong history, Fortis has already announced its plans to continue raising its dividend through to 2028. It plans to do so at a rate of 4-6%, which could definitely help investors stay ahead of inflation.

Foolish takeaway

Dividend investing is a very popular strategy among Canadians. Investors should look for companies that have a long history of paying dividends and that are able to grow dividends year after year. However, if you had to choose one quality to focus on, I’d suggest the latter. Fortis is an excellent example of a company that grows its dividend each year. It maintains a 50-year dividend-growth streak with plans to continue doing so at a steady rate through to 2028.

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 Jed Lloren has positions in Fortis. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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