Dividend Growth – Does it predict stock performance?

Many investors like or prefer dividends. Beyond dividends, they specifically like DIVIDEND GROWTH stocks.

What is a dividend growth stock?

They are are stocks that have been regularly growing their dividends. Preferably at a level above inflation. Normally above 3%. If you had one stock with a dividend growth of 8% and another with a dividend growth of 3%; you’d want the one with 8% growth if using dividend growth as a screener. You can look at Dividend Growth over the course of one year, or over the course of many years (5 years is common).

stock ticker symbols with prices

CAUTION-If you see a stock that has grown it’s dividend at a 100% or even at a 1000% rate you need to do some serious investigating. This can happen if a company has cut it’s dividend recently and now it has returned. Naturally, they will show something close to a 100% rate of growth. Also, companies that barely paid any dividend suddenly increasing it at an astronomical rate.

Can Dividend Growth be used to pick good stocks?

Here are some examples from my own portfolio. All dividend growth metrics are Annually, over the last year.

Best Buy

Dividend Growth rate- 25.74% vs. 1 year Return -17%

General Mills

Dividend Growth 5.88% vs Return of 29..43%


Dividend Growth of 53% vs. Return of -31%

Traveler’s Insurance:

Dividend Growth of 5.68% vs. Return of 22.52%

There really is no correlation between how much the dividend grew and stock performance. Some stocks had lots of dividend growth but a horrible performance. In fact, right after Fedex announced their HUGE dividend increase, the stock soon tanked! General Mills was one of the best performers in my portfolio; however, it’s dividend growth was less than inflation this year.

These are just a few stocks out of my own portfolio. I’m about to list a bunch of others with incredible Dividend Growth rates that did poorly over the last year. You might say, but some stocks with dividend growth did well. However, that’s not how this game works. In order to be an accurate predictor of stock return’s, it must work nearly all of the time, or at least most of the time.

1 yr Dividend Growth vs. 1 yr stock Returns

1 Yr Dividend Growth Rate1 Year Return
Advance Auto Parts50%-38%
Abbott Labs13.3%-22%
T. Rowe11.11%-43%
American Express21%-10.5%
J.B Hunt33.33%-10%
Dividend Growth vs. Annual Returns

Once again, there is no direct correlation between Dividend Growth and Stock Return. Some of the stocks that raised their dividend by 50% are performing the worst. Both Zoetis and Advance Auto Parts have had a horrible year. Target announced a big increase and then the stock took a turn for the worst. By the way, even though they are down, American Express and J.B Hunt are down less than the market.

I like Dividend Growth as much as anyone. However, it paints an incomplete picture and can’t be used as a predictor of stock price movements. Why would a company grow it’s dividend at a faster rate one year?

  • Couldn’t find acquisitions to make
  • Chose not to buy new equipment
  • Chose not to invest in more research

All of these things aren’t necessarily good things, depends on the context. I had a small cap stock once that was growing it’s dividend at an incredible rate. However, after investigating, it was clear that the company wasn’t growing elsewhere. I moved the money into an index fund.

Closing Words:

I wouldn’t discourage anyone from using Dividend Growth as a screener; I do it myself sometimes. However, just understand that Dividend Growth alone is not going to help you pick winning stocks. On the other hand, if you find a stock whose dividend growth has been slowing every year (MPW comes to mind), you might be in for some trouble. At some point, your dividend growth isn’t keeping up with inflation.

As always, I’m not a financial advisor. Never take anything you read on the internet as financial advice. Why? Your portfolio and risk profile is your own. Investments work within the context of one another, not in isolation. Hence why it’s best to seek out professional guidance.

Wishing you the best on your investment Journey!

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