Dividend Growth is the foundation of Headwaters Investment Strategy. Dividend growth investing provides investment income that will continually increase every year while preserving the opportunity for principal growth.
This gives clients an all-weather strategy that outperforms through bull and bear market cycles, in rising or declining interest rate environments, and in low or high volatility periods. We win by not losing! Our strategy seeks to find the perfect harmony between growth and value.
Dividend distributions act as a constant reminder to management who really owns the company, the public shareholders. They keep management focused on continuing to create and maintain shareholder value. A rising dividend is the best predictor of future corporate performance.
The long-standing payment of the dividend is a great indicator of the stability of a company's business model. Dividends are an expression of management's confidence in the present and a rising dividend is a very strong expression of management's confidence in the future. As a strong part of corporate culture, a rising dividend is a clear signal from management that they can maintain into the future the current performance of the company.
Individuals approaching retirement are typically sold a wide array of fixed income investments such as annuities, bonds, bond funds and many others. While these investments do provide consistent and dependable income there is one very noteworthy disadvantage, they do not account for inflation.
Stocks that pay rising dividends provide the best inflation proof source of income. Over the past 85 years dividend growth has exceeded inflation approximately 2% annually. While on the surface it may seem that inflationary impact may not be that severe, even a modest annual inflation rate of 3% corresponds to a 24% decline in purchasing power after only 9 years.
Power of Compounding
Albert Einstein is quoted as saying “The most powerful force in the universe is compound interest.” The power of compounding acts as the primary driver of our dividend growth strategy. Annually increasing dividends is the compounding force that multiplies our client’s cash flows as well as the underlying value of each of their investments driving market beating total portfolio returns.
The Compounding Effect of Dividend Growth:
Compound interest is a powerful force, compounding growing dividends is like compound interest on steroids.