Future DPS = Current DPS x (1 + g)^n
Where g = annual growth rate and n = number of years. Yield on Cost (YOC) is the future dividend divided by your original purchase price.
Dividend growth investing is a strategy focused on buying stocks from companies that consistently increase their dividend payments over time. Rather than simply chasing the highest current yield, dividend growth investors prioritize companies with a track record of raising dividends annually, often referred to as "Dividend Aristocrats" (25+ consecutive years of increases) or "Dividend Kings" (50+ years).
The power of dividend growth lies in compounding. A stock yielding 2% today with a 10% annual growth rate will yield over 5% on your original cost basis in just 10 years. Over longer periods, this compounding effect can generate substantial income streams that significantly outpace inflation.
Yield on Cost (YOC) is a key metric for long-term dividend investors. It measures the current dividend payment relative to your original purchase price, rather than the current market price. As dividends grow over time, your YOC increases, reflecting the true return on your initial investment.
For example, if you bought a stock at $40 per share paying a $1.20 annual dividend (3% yield), and the dividend has grown to $3.00 per share over 10 years, your YOC would be 7.5% -- significantly higher than the initial yield. This metric helps investors appreciate the long-term benefits of holding quality dividend growth stocks through market cycles.
Past dividend growth rates are not a guarantee of future performance. Companies may slow or stop dividend increases due to economic downturns, industry disruption, or strategic shifts in capital allocation. Always evaluate a company's payout ratio, free cash flow coverage, and competitive position when assessing the sustainability of dividend growth.
Diversification remains essential even for dividend growth portfolios. Concentrating too heavily in a single sector or company exposes you to sector-specific risks. Consider building a portfolio across multiple sectors -- consumer staples, healthcare, utilities, financials, and technology -- to create a more resilient dividend income stream.