Dividend Growth Stocks: Having Your Cake and Eating it, Too

Do dividend growth stocks really exist or do you have to settle for one or the other – dividends or growth?

There are plenty of growth stocks that pay a dividend, but frequently, the dividend is so low that it takes years to make enough from the dividend to consider it a significant part of your profits.

When we say dividend growth stocks, we’re talking about companies that yield 3-4%, or more, and don’t have stock prices that act financially comatose.

These dividend growth stocks do exist and there are strategies for finding them.

How to Find Dividend Growth Stocks

First, if you’re a day trader or somebody who relies on technical analysis for your stock picking, this is a fundamental analysis based strategy although even as a technical trader, it’s a good idea to diversify your portfolio with high quality medium and long term holds based largely on fundamentals.

You probably know that a dividend stock pays you a certain amount each quarter in exchange for owning their stock.

Dividend stocks often represent mature companies that no longer have an impressive growth potential (not always, but most dividend payers fit this description).

For instance, Exxon is a large oil company and no longer has the ability to double their stock price in relatively short order.

This makes them largely unattractive to growth investors, so Exxon pays a dividend to make up for that lack of growth.

A growth stock is a company with a stock price that still has the potential to see dramatic gains. Apple is an example of a stock that has the potential for large price gains.

Apple has no need to pay a dividend, because they can pay their investors back by continuing to grow their stock price (although some argue that Apple is hoarding too much cash and some of it should be returned to investors).

As a general rule, dividend growth stocks aren’t plentiful, because companies generally offer an investor only one form of growth.

Since the amount of dividend paid per share doesn’t change with the market price of the stock, when the stock price falls, the dividend yield goes up. When a growth stock is at historic lows, it may yield 5% or higher.

This is how a dividend growth stock is born.

How do you find these stocks? The best way is to use a stock screener. One of the best free stock screeners may be found at Yahoo Finance.

The screener allows an investor to select detailed criteria for screening. To find a dividend growth stock, an investor could ask for stocks that have a dividend yield higher than 4% and has seen a 10% drop in share price.

Another way is to keep your favorite stocks on a watch list and set alerts through your brokerage account when the yield rises above 4% (or some threshold that matches your dividend investing strategy).

For additional research, check out TheStreet.com. Receive a FREE copy of Jim Cramer’s Getting Back to Even with a subscription to Action Alerts PLUS.

Dividend growth stocks aren’t in large supply, and you should never pick a stock only based on these two criteria.

Quality companies don’t always have quality stock fundamentals, but they will eventually.

Always pick stocks based on their fundamentals.

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  1. I like to combine both methods. First i search the stock screens at Investor’s Business Daily (investors.com on line) to find lists of top quality stocks (hitting the fundamental side); then I start watching the charts and the technical indicators I like to use to decide to right time to buy that stock. It’s worked well for me the last two years.

    • That’s a pretty good strategy, Mary. I definitely don’t think buying dividend stocks on autopilot is a smart strategy – got to look for the right entry points based on your goals.

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