The Hierarchy of Dividend Growth

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Anyone who’s played an MMO knows how important titles are. Having a specific title for a character’s achievement shows what you’ve accomplished, and other players will recognize that as a sign of your quality as a player. Dividend stocks have titles of their own. There is a hierarchy of 3 levels to show the achievements of a dividend stock.

A “Dividend Achiever” has raised its dividend for 10 consecutive years. A “Dividend Aristocrat” has raised its dividend each year for 25 years. Finally, the most prestigious of dividend titles, a “Dividend King” has risen its dividend for 50 consecutive years. This title is as epic as it sounds, fifty years is a really long time and crosses through a couple of recessions. A company that has maintained this kind of record is going to try pretty hard not to break the streak.

Now, just because a dividend stock has earned one of these titles, it does not mean that it is a must buy. There are still factors to take into consideration regarding its valuation. For instance, stocks of this caliber may be overvalued in the current market, and you should wait to make your purchase. Usually, checking the P/E Ratio can help you determine this. A P/E ratio over 20 means the stock may be overvalued. Another risk factor to consider is the payout ratio. A payout ratio higher than 60% means the company may not be able to afford to keep raising its dividend.

Think of it this way, if you were to pay a player with a nice title to join your party for a dungeon. The dungeon might go easier, but if the the cost is too high, you might end up worse off after the dungeon than before you started. Personally, I try to buy stocks on these lists because it’s a good sign that the dividend will continue to increase. However, if a dividend achiever has a more attractive yield, P/E ratio, and payout ratio than a dividend king, I will buy the achiever.

How about you, do these titles impress you?

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