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How to Pick Dividend Growth Stocks (A Comprehensive Guide)

How to pick dividend growth stocks

Investing in dividend growth stocks can be incredibly lucrative. But to be successful, you need to know how to pick dividend growth stocks, effectively.

In this post, I do my best to show you how.

I will go over the main aspects you need to take into account when picking dividend growth stocks.

As usual, I will share key nuggets of information that I have acquired throughout my investing journey. This includes the single best (and free) dividend growth stock resource.

And make sure you stick around to the end, where I synthesize it all into 10 practical and actionable steps!

A brief introduction to dividend growth investing


Dividend growth investing is investing in stocks that have a track record of not only maintaining but also raising their dividends every year.

Dividend growth stocks are beloved by investors because:

  • They provide a stable, predictable and growing income every year
  • They allow you to benefit from double compounding (exponential impact of reinvested dividends when combined with dividend growth)
  • They have a tendency to generate capital gains in line with the dividend growth rate
  • They fit the profile of the long term investor, which are still in the accumulation phase and don’t need to live off of a high yield today.

If you’re reading this, you’re probably already familiar with the advantages of dividend growth investing. 

So let’s dive right into how to pick dividend growth stocks!

And it all starts with…

Dividend growth investing resources


Screening for stocks with a dividend growth history is the best starting point when researching dividend growth stocks.

Thankfully, there are several free resources available for you to take advantage of. 

They provide comprehensive “screen-able” lists of dividend growth stocks along with associated metrics that are relevant for the dividend growth investor.

There are also some paid dividend growth screening tools but these are to be considered once your portfolio has grown large enough to amortize the cost.

I definitely recommend starting with dedicated dividend growth investing resources because they are the most efficient way to identify dividend growth candidates on which to do further, more detailed, research.

It definitely beats a scattergun approach or waiting for a financial media outlet to bring a dividend growth stock to your attention.

Dividend growth track record (dividend growth history)


Dividend growth stocks are classified according to their dividend growth track record. This track record is incredibly valued by dividend growth investors.

This is evident when looking at the fancy titles attributed to those with the best dividend growth history:

  • Dividend Kings – S&P 500 companies that have paid increasing dividends for 50+ consecutive years
  • Dividend Aristocrats and Dividend Champions – Companies that have paid increasing dividends for 25+ consecutive years. Dividend Aristocrats relate only to S&P 500 companies while Dividend Champions is a term typically applied to all stocks with this characteristic.
  • Dividend Contenders – Companies that have paid increasing dividends for 10+ consecutive years
  • Dividend Challengers – Companies that have paid increasing dividends for 5+ consecutive years

Important things to consider when looking at dividend growth history

With Dividend Kings (50+ years) and Dividend Aristocrats / Champions (25+ years), the dividend growth history speaks for itself. These stocks are without question committed to growing their dividends and will do their utmost to maintain that streak.

For Dividend Contenders (10+ years) and Dividend Challengers (5+) on the other hand, it is important to investigate whether the companies have cut the dividend prior to establishing this record.

For example, many companies cut their dividends after the Global Financial Crisis of 2009 and have managed to deliver consecutive years of dividend growth since then, during an unprecedented bull market.

If a current Dividend Contenders (10+ years) cut its dividend in the past before establishing this record, it is not necessarily a problem per se.

However, it is important to get an idea of the magnitude of the cut and how many years it took for the dividend per share to exceed the amounts distributed versus the cut.

For Dividend Challengers (5+) years, I would recommend avoiding such stocks as dividend growth investments if it turns out that they have cut their dividends prior to establishing a new record. I would wait until they reach the Contender status before evaluating them.

If the stock is a new dividend initiator, meaning that it has established 5+ years of consecutive dividend growth after initiating a dividend for the first time, then this could be a great opportunity to “get in on the ground floor”.

They should definitely be considered but keep in mind that they don’t have as much of a stake in maintaining this streak going forward.

All else being equal, you want to prioritize companies with the longest dividend growth track record and those that have never cut their dividend.

Dividend growth rate and dividend yield


While a long track record of dividend growth is incredibly important when it comes to dividend growth investing, it is equally important to investigate the dividend growth and yield profile of your investment candidates.

Generally, large and mature companies with a long dividend growth track record do not have as much ability to grow earnings at a fast pace due to the “law of large numbers” and as such exhibit slower dividend growth rates.

They typically reward shareholders with higher dividend yields because the opportunities to reinvest in the business, for growth, is somewhat limited.

Conversely, companies with a relatively large growth runway ahead of them, and that are still reinvesting the majority of their earnings back into the business, will choose to distribute a lower amount to shareholders.

They typically have shorter dividend growth track records but will have the potential to substantially grow dividends over time, as the company continues to grow and approaches maturity.

The key take-way here is that there usually a trade-off between yield and growth.

The Holy Grail is high yield and high growth. Do keep a lookout for such opportunities because, occasionally, they do arise!

Needless to say, avoid low yield and low growth.

You are free to choose the yield and dividend growth profile that suits your portfolio requirements.

Personally, I don’t restrict myself to a particular yield and dividend growth profile and just choose to seize opportunities as they present themselves.

Dividend safety and dividend growth sustainability


While dividend growth history and historical growth rates may indicate that a company has successfully delivered on its dividend growth policy in the past, they are just a starting point.

It is important to dig deeper in order to establish whether you have reasonable confidence of dividend safety, going forward.

Let’s go over some key aspects I look at to try and determine whether a company will be able to continue to grow its dividend for the foreseeable future.

Dividend Payout Ratio

The Dividend Payout Ratio (DPR) is calculated as the total amount of dividends distributed to shareholders divided by total annual company earnings. It can also be calculated as the dividend per share divided by Earnings per Share (EPS).

A similar metric is the Free Cash Flow Dividend Payout Ratio. It is calculated as the total amount of dividends distributed to shareholders divided by the total annual free cash flow.

In my view the Free Cash Flow ratio Dividend Payout Ratio is a superior metric because it directly related to cash and dividends are, after all, a cash payment.

Regardless of the metric you choose (I suggest calculating both of them and investigating the reason for any major discrepancies), the lower the ratio, the more leeway the company has to increase dividends in the future, particularly if earnings are growing as well.

When analyzing payout ratios, make sure to take averages over the last 3-5 years and to always be a bit more conservative than the latest numbers. You never know what the future holds and you don’t want to be caught flat footed because the company happened to have a one-off exceptional year. 

You should avoid really high DPRs (e.g. in the 85-100% range or above) because they leave very little room for growth and increase the risk of a dividend cut if the company finds itself in difficulty.

DPRs in the 70%-85% range should leave room for low single digit growth that matches inflation but you should make sure that you are receiving enough yield to compensate for the lack of growth.

DPRs in the 10% to 60% range should leave room for considerable dividend growth that handily beats inflation. 10% being better than 60% in this regard of course. 

My point here is that you can successfully invest across different DPR ranges.

You just need to make sure that you’re getting paid enough yield relative to the Dividend Payout Ratio. This is incredibly important.

Let’s say I have two investment opportunities:

  • Company A,  paying a 5% dividend at 80% DPR and
  • Company B, paying a 2% yield at 40% DPR.

All else being equal (earnings growth in particular), I would pick the 5% dividend stock because if the other company increased its DPR to 80%, it would only be able to pay a 4% yield. If I expect a 6% yield for an 80% DPR, then none of them will do. 

It is a crude but quick way to assess the DPR relative to yield. 

Earnings and Cash-flow growth trends

Take a look at the company’s earnings and cash-flow trends, are they stable and rising over time? If so, good.

After all, there is nothing better for future dividend safety than continued earnings and cash-flow growth.

And, I want to highlight, that the most sustainable and desirable type of dividend growth is one which more or less reflects earnings and free cash-flow growth.  

If a company is not growing earnings or free cash flow but continues to grow the dividend, then there will come a point when it will no longer be able to grow its dividends. And we don’t want that do we?

Well generally, no, except if when this stage is reached, the company will be able to pay a generous dividend yield on your cost. This is also where the value of my DPR relative to yield tip (that I highlighted previously) comes in handy.

Another situation where stable earnings or free cash-flow could be acceptable is if the company is buying back shares (hopefully at good valuations). That’s why it’s also important to check the earnings and free cash-flow trends on a per share basis.

Share buybacks means less outstanding shares for the same amount of earnings or free cash-flow.

This boosts the per share metrics and will enable the company to continue to safely grow dividends while maintaining the total annual amount of dividends at a similar level.

Of course, we should prefer growth both on an absolute and per share basis because we don’t want our dividend growth to be solely generated by financial engineering. However, this should be evaluated in a broader context.

After all, if the company generates huge cash-flows and can afford to consistently buy back shares in a prudent manner and if the dividend yield and dividend growth profile is enticing enough, then there could be a sound investment case to make.

Business quality and valuation


Make sure that you don’t limit your research to dividend growth history, dividend growth rate, dividend yield, dividend safety and dividend growth sustainability.

They simply help you to narrow down to a list of dividend growth candidates to invest in. 

Don’t forget that you should be investing in a company first and investing for dividend growth second. 

Business quality

When you are dividend growth investing, you want to ensure that you are investing in a quality business that will continue to prosper for the long term. Here are some questions to help you determine whether you have a good business going forward:

  • What are the future prospects for the company’s markets in the future? Is the market growing?
  • Does the company have a clear strategy for growth going forward and has it started to successfully execute on its plans?
  • What is your view on Management? Are they trustworthy? Have they been successful in adapting to the constantly changing environment?
  • Does the company have a moat? What are the trends in margins over time?
  • What does the balance sheet look like? Is the company saddled with too much debt? If so, does it generate sufficient cash-flow, after paying the dividend, to pay down its debt?
  • What are the main business risks going forward?

Make sure that you understand the company and that you have at least reviewed the latest annual report and quarterly and investor’s day presentations. It is highly recommended to listen in on the conference calls because many insights can be obtained from analyst questions and it will also allow you to get a feel for management.

Once you’re reviewing the financial reports, make sure to review the relevant dividend growth metrics because you should always cross-check third party financial data with the official source.


Always remember, a great business can be a bad investment and a bad business can be a good investment. This is because the battle is won or lost depending on the price you pay.

You need to make sure before you invest that you are buying below fair value or, worst case, at fair value.

When it comes to dividend growth investing, the aim should be to buy a great business at a reasonable price, or even better, at a great price. While they could be a good investment, when it comes to dividend growth, you avoid investing in a poor or just good business at a great price.  

This is because you want to be able to hold onto your investment for the long term to allow your investment to compound.

My favorite metrics when looking at valuation are:

When looking at valuation metrics, make sure to compare the company with its peers and, more importantly, with regards to its own history. If a company has averaged a PE ratio of 15 over the past 5 or 10 years, and is now trading at a PE of 12, then it could be a sign of undervaluation.

Another key indicator that is useful to look at from a valuation perspective, particularly for dividend growth investing relates to comparing the current dividend yield of a stock with its historical dividend yield.

If the stock’s current yield is considerably greater than its historical yield, then it is likely undervalued and if its yield is considerably lower than its historical yield, then it is likely overvalued.

This is known as the Dividend Yield Theory.

If a potential dividend growth investment ticks all the boxes except for valuation. Then refrain from investing but do make sure to add it to your watch-list and follow it closely so that you can strike when an opportunity presents itself.

How to pick dividend growth stocks (in 10 practical steps)   

Now that you have a good overview on how to pick dividend grow stocks. Let’s transform what we learned into an actionable process:

  • Step 2 – screen and filter based on the dividend growth history
  • Step 3 – reduce this list further by filtering based on portfolio fit (eliminate certain industries, or stocks below a certain market cap, etc.)
  • Step 4 – quickly and methodically go through the list and retain candidates that have the yield and dividend growth profile you want
  • Step 5 – analyse retained candidates’ payout ratios and earnings / cash-flow growth trends. You can use a reputable financial website for this step (Morningstar, Yahoo Finance,, Google Finance, etc.)
  • Step 6 – reduce the list to a maximum of 5-10 of the best candidates
  • Step 7 – start conducting deeper research on the remaining candidates (find out about the business, analyse financial reports, read the latest news, listen to conference calls, etc.)
  • Step 8 – discard those that are not quality businesses (stop researching as soon as lack of quality becomes apparent)
  • Step 9 – assess the valuation of the final candidates
  • Step 10 – invest in those that are undervalued and put the rest on your watch list!

It is perfectly fine to change the order of some of the steps according to your own preferences, especially as you gain experience and get comfortable with your investment approach.

After all, there is no one-size fits all when it comes to investing.

Take control of your dividend growth journey! And I hope that this post on how to pick to dividend growth stocks has helped you do so.