One of the best parts about owning stock in a company that increases its dividend is the fact that the increase puts more money in your pocket without you having to sell your shares. Even better, if that company continues to increase its dividend over time, those dividends can turn into a rising stream of passive income for you.
As awesome as that sounds in theory, it's a bit tougher than that in reality. You can't control whether a company will increase its dividend, and indeed, a dividend is never a guaranteed payment. Still, here are three things you can do to help yourself improve your chances of seeing your dividends increase.
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No. 1: Look at the company's dividend history
If a company has a decent history of increasing its dividend over time, that doesn't happen by accident. After all, those dividends consume a lot of cash that could otherwise be put to use to build the company's business.
Instead, those dividend increases happened because the company's leadership chose to prioritize generating cash and keeping much of that cash available for distribution to shareholders. While past increases are not a guarantee of future ones, they do show that the company is willing to boost their dividends and has put at least some thought and effort into being able to do so.
No. 2: Seek out a reasonable payout ratio
The only sustainable source of dividend income is money the company earns from running its operations. Yet in addition to potentially being available for dividends, that cash is also an attractive source of financing for a company's future growth. That's especially true in these days of higher interest rates where businesses need that much higher a rate of return to justify borrowing money.
As a result, it's important for investors looking for dividend growth to assure that the company keeps enough of what it earns to invest something to support that growth. A payout ratio below about two-thirds of earnings generally allows the company to use enough of its earnings to support future growth to give it a reasonable chance of offering future dividend increases.
No. 3: Keep an eye out on the company's moat -- and what could disrupt it
While dividends do represent tangible rewards for shareholders for the risks they're taking by investing, those same dividends remove money from the company's control. That's money the business could otherwise use to help strengthen its operations and fight off competitive threats.
As a result, it's important for investors looking for dividend growth to recognize what the company's competitive advantages are, and to keep a sober eye on the potential threats to those advantages. Because dividends are never guaranteed payments, if a business feels like its moat is threatened, its dividends may get cut in order to help shore up that moat to protect its longer term future.
On the flip side, if a company can continue to protect and strengthen its moat, then its dividend may very well find itself with that much room for growth over time. Either way, keeping an eye on a company's ability to hold off competition can go a long way toward helping investors recognize a sustainable dividend with the potential to grow.
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As awesome as dividends can be, the fact that they're never guaranteed payments makes it very hard to rely on them to cover your costs. While you can't eliminate the risks of dividend investing, by paying attention to these three factors, you can tilt the odds better in your favor. Make today the day you put them front and center in your investing strategy, and boost your chances of being invested in businesses that can give you a growing income stream.
