My Passive Income Journal

Dividend Growth Investing vs. Growth Investing

My opinion is that dividend growth investing provides me with safety. It’s true for me – many would hotly disagree though. In recent times of market downturns and economic uncertainty, investors might seek strategies that provide stability and security for their portfolios. Dividend growth investing and growth investing are two popular approaches, but, understanding their differences and how they perform during market downturns is crucial. This article explores the advantages of dividend growth investing as a safer option compared to growth investing in turbulent market conditions. By examining the key characteristics and benefits of dividend growth investing, I hope this helps you begin to look into this subject more.

Focus on Steady Income

Dividend growth investing centers around companies that consistently increase their dividend payouts over time. These companies prioritize building high quality business with economic moats. They distribute profits to shareholders, providing investors with a reliable and predictable stream of income. This focus on generating steady income, even during market downturns, offers a layer of stability that growth investing may lack.

Long-Term Value

Dividend growth investing emphasizes long-term value creation. By selecting companies with a history of increasing dividends (NB: not high dividends), investors align themselves with businesses that have demonstrated their ability to weather economic cycles successfully. This long-term perspective reduces the impact of short-term market volatility and positions investors to benefit from compounding returns over time. For the record, all my holdings have paid increasing dividends for many decades. They’ve never missed a dividend (that’s right – never). They’ve never reduced a dividend.

Capital Preservation

This consideration becomes vitally important once we are relying on our investments to live. It’s easy to rationalise market gyrations when we are still accumulating, but not when we are retired or semi retired. During market downturns, dividend growth investing tends to fare better in terms of capital preservation compared to growth investing. Companies that prioritize reliable dividend growth often have stable cash flows and sustainable business models. This makes them more resilient to economic shocks. The consistent income generated by dividends can act as a cushion, reducing the overall impact of market downturns on the investor’s portfolio.

Dividend Growth Investing
Dividend Growth Investing

Reduced Reliance on Market Performance

Growth investing typically relies on capital appreciation, which is closely tied to market performance. If you were relying on selling off growth shares incrementally to fund your retirement, you’d be sick to your stomach during a downturn. I don’t have the stomach for that.

In contrast, dividend growth investing places less emphasis on market fluctuations. The regular income generated by dividends offers a level of independence from market conditions, providing investors with a stable source of returns, regardless of short-term market trends.

Dividend Reinvestment

Whilst in accumulation mode, dividend growth investing allows investors to take advantage of the power of dividend reinvestment. By reinvesting dividends back into additional shares of the dividend-paying companies, investors can harness the compounding effect and accelerate the growth of their portfolios. This reinvestment strategy becomes particularly valuable during market downturns when stock prices may be lower, enabling investors to accumulate more shares at discounted prices. Deciding how to allocate your dividends puts you in control.

Historical Performance

Historical data supports the notion that dividend growth investing performs better than growth investing during market downturns. Studies and analyses have shown that dividend-paying stocks tend to be less volatile and experience smaller drawdowns compared to non-dividend-paying stocks. This stability can provide investors with peace of mind and confidence in their investment strategy during challenging market conditions. I sailed through the late 90’s, 2007, 2020 and all the intervening and recent market fluctuations without missing or decreasing a single dividend payment. I slept just fine.

Diversification and Risk Mitigation

Dividend growth investing often involves investing in companies across various sectors and industries. This diversification helps spread risk and reduces the reliance on any single company or sector. By holding a diversified portfolio of dividend-paying stocks, investors can mitigate the impact of market downturns on their overall investment performance.

Emotional Discipline

Considering the entire world seems to be wedded to the press and it’s obsession with market prices, it’s no wonder dividend growth investing is misunderstood. When was the last time you heard dividends being reported on the nightly news? Dividend growth investing encourages investors to adopt a long-term perspective and maintain discipline during market downturns. The regular income from dividends can help alleviate the fear and panic that often accompany volatile markets, reducing the likelihood of making emotional, knee-jerk reactions. This disciplined approach allows investors to stay focused on their long-term goals and resist the temptation to engage in market timing or speculative behavior.

I track my actual paid dividends with far more interest than my theoretical stock price.

The Safety of Dividend Growth Investing vs. Growth Investing

In times of market downturns, my opinion is that dividend growth investing offers a safer and more stable approach compared to growth investing. The focus on steady income, long-term value creation, capital preservation, reduced reliance on market performance, dividend reinvestment, historical performance, diversification, risk mitigation, and emotional discipline all contribute to the resilience and performance of dividend growth investing during turbulent market conditions. By selecting companies with a track record of increasing dividends, investors position themselves to benefit from consistent income and potential capital appreciation over the long term.

While growth investing may offer the allure of high capital returns and more favourable tax treatments, it is often more susceptible to market volatility and can experience significant drawdowns during downturns. Dividend growth investing, on the other hand, provides a more stable and reliable income stream, helping investors weather market storms with greater confidence and peace of mind.

It is important to note that dividend growth investing is not without risks. It’s not a silver bullet. Economic factors, changes in company fundamentals and dividend cuts are all potential challenges that investors may face. However, by conducting thorough research, diversifying their portfolios, and selecting companies with strong financial health and a history of consistent dividend growth, investors can mitigate these risks and increase their chances of success.

Conclusion – Dividend Growth Investing

So, when it comes to navigating market downturns, dividend growth investing has distinct advantages over growth investing. The focus on steadily growing income, long-term value creation, capital preservation, reduced reliance on market performance, dividend reinvestment, historical performance, diversification and emotional discipline make it a safer and more resilient strategy. By accumulating stocks that growth their dividends, investors can enhance their ability to withstand market turbulence and achieve their long-term financial goals. The end game is a reliable stream of dollars into your pocket no matter what. Dividend growth investing gives me that in spades.


Hugh Walker