The Dividend Triangle is a concept that Mike invented to describe the foundation of his investment strategy. It consists of three metrics: revenue growth, earnings growth and dividend growth.
The dividend triangle can help investors to narrow down their stock research and to find leaders in their market. In other words, it is a good start for your dividend growth stock analysis!
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You’ll Learn
- How the Dividend Triangle is acting as a good foundation in an investment strategy.
- Why are these three metrics so important (revenue growth, earnings growth and dividend growth) and which one matters more.
- Situations in which the dividend triangle does not apply and what to do.
- Why focusing on dividend growth rather than dividend yield.
- Examples of perfect dividend triangle stocks.
Why is the Dividend Yield NOT Part of the Equation?
Yup, you read it right. The dividend yield is not part of my Dividend Triangle. In fact, I give very little weight in my investing process. Why is that? Because when you pick up a strong company growing its dividend, its yield become a minor play in the equation. What you “lose” in yield, you will get it back in stock appreciation.
I don’t mind the dollar amount or the yield, I solely focus on dividend growth.
When a company shows growing revenues and growing earnings, it can think about showing continuous dividend growth. Don’t forget that the money spent on shareholders is gone from the company. This means it will not help the business generate additional revenue in the future. This is why management must build a strong business model to ensure it can continue paying their shareholders.
I’ve repeated it many times on this blog, but if there is one metric I would have to follow, it would be dividend growth.
I understand that yield is important when you are retired and you expect your portfolio to generate enough income so you can enjoy a stress-free retirement. At that point, yield does matter, but not at all cost. In fact, you are probably better off with a portfolio yield of 3.5%-4% with a steady capital appreciation and withdraw a total of 4- 5% of your portfolio (e.g. selling a few shares) each year. If you aim at an 8% withdrawal rate, no matter if you want to do it through dividend yield or by selling shares; you are going to bleed your portfolio out rapidly.
More on the Same Topic
The Dividend Triangle – The Equation to Successful Dividend Growth Investing
Hello – listening to this podcast you mentioned that you prefer less dividend yield and more growth – maybe this statement should be qualified – it makes some sense if you are 15-20 years before retiring – but not during retirement – say you retire at 65 – I ran the math of two stocks : one with a yield of 2.5% and growth of 10% and another with yield of 5% and growth of 5% – so half the dividend at twice the growth – it takes 15 years for the smaller yield to catch up – by then the retiree is 80 and have lost a lot of income
Hello Jose,
The problem with your calculation is that you only consider the yield side and ignore the total return of both investments.
I have yet to find a 5%+ yielder outperforming over 5 and 10 years of yield high growth stocks. In fact, many 5%+ will end-up cutting their dividend (there is a reason why you get a high yield, it’s because there is a risk attached to it).
Cheers,
Mike
Thank you for reaching back – I understand what you are describing – if you have an analysis that you can share I would appreciate it
On another topic, in one of your episodes you mentioned retirees asking you that they need 5% yield on their portfolio to live during retirement – that is a straight arithmetic and an understandable situation – but you are not offering strategies to deal with that situation and transition to a strategy of low yield high growth (LYHG) – what should they do ? cut expenses so you can live on LYHG ? – start with a 50/50 meeting 5% (meaning half of the portfolio on LYHG and the other on HYLG) ? – what would be your general direction to an investor in that situation ? – he can’t go back 10 years and start with a LYHG to reach 65 with sufficient dividends to cover expenses in retirement
Hello Jose,
I guess you are part of my newsletter, right? We share a resources page where you can download our dividend income for life guide. It will answer both your questions 🙂
You can watch this webinar about the topic too: https://my.demio.com/recording/ReAe2zBX
Cheers,
Mike