If you're investing in a dividend stock that doesn't raise its payouts regularly, you could be missing out on lots of potential income. That's because over time, inflation will chip away at your returns. Collecting $1,000 in dividend income today could be the equivalent of just $817 in a decade (assuming an inflation rate of 2% each year). But how much could you be missing out over a longer period of time, and when investing a larger sum of money?
Below, I'll look at Walgreens Boots Alliance (WBA -1.33%), which as a Dividend Aristocrat has a terrific track record for consistently raising its payouts, and how much more you could potentially earn by investing in it than you would with a stock that doesn't increase its dividend payments.
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Walgreens has upped its dividend by an average of 10% per year over the past decade
If you invested in Walgreens 10 years ago, you would have received a quarterly dividend of $0.175 from the company. Today, it is paying its shareholders more than double that amount -- $0.4675. That's an increase of 167% over a decade, which equates to an average compound annual growth rate of 10.3%. This doesn't guarantee that your dividend income will always rise by that amount, but it does demonstrate the company's commitment to creating value for its shareholders. Its most recent hike was an increase of just 2.2% from the previous payout of $0.4575.
Ultimately, it is the company's financial health and growth prospects that determine whether management decides to raise the dividend. And dividend payments are never guaranteed. However, a company with a track record as impressive as Walgreens' 45 straight years of dividend increases is unlikely to suddenly stop raising its payouts unless it faces something truly catastrophic.
How much income could you be losing by not investing in a dividend growth stock?
Today, investors who buy Walgreens stock can earn a yield of 3.4%. On a $25,000 investment, that could mean $850 in annual dividend income. If the company were to raise its dividend payments by, say, 5% (which is less than its historical average but above its latest rate hike), those payments could grow to nearly $1,400 in the next 10 years.
But how does that compare to investing in a company that doesn't raise its payouts, and how would those returns would look when factoring in an inflation rate of 2%? Below is how the inflation-adjusted dividend income from Walgreens might compare to a stock that pays the same yield today but that doesn't increase its payouts.
Data source: Walgreens. Chart by author.
On a $25,000 investment, over a 40-year period, you could miss out on more than $41,000 in potential dividend income by going with a stock that doesn't raise its payments.
This assumes that Walgreens will continue raising its payouts by 5% each year, which is by no means a given. Amid rising competition from Amazon and other companies that may chip away at Walgreens' market share over the years, investors shouldn't take anything for granted. However, the point of this analysis is just to show that regardless of the time frame you are looking at, you could be leaving money on the table if you don't invest in dividend growth stocks.
Investors have many options for recurring dividend income
Walgreens is just one top dividend growth stock you can invest in today. One of the most promising income stocks, Innovative Industrial Properties, isn't even a Dividend Aristocrat. But given its impressive profits and the growth potential in the cannabis industry, it could become one in the future.
When deciding on a dividend stock, it's important to pick one that has raised its payments in the past and that also has a bright future ahead -- one in which its profits are likely to rise and support a growing payout.
