Dividend Growth Investors: Quality Might Be Only Half The Battle

“Quality” is a highly subjective term in the equity realm, with potentially variable assertions from investor to investor. One prevalent definition of a “quality” dividend growth stock is one with a long history of upward climbing payouts, with durable business attributes, and positive current quantitative factors.

Thus, it is no mistake that large-cap stocks with multi-decade dividend histories seem to dominate such portfolios. Some commentators or investors might refer to some of these specific names as “forever” holdings. In other words, they should be bought and then never sold. Whether you should maintain that kind of mentality or not is an interesting subject, but beyond the scope of this article.

To maximize dividend growth over the long run, investors need to find equities possessing attractive combinations of current yield, dividend growth sustainability, and appropriate risk over a certain time frame. Of course, for some, dividend growth maximization may be subordinate to current yield or some other time-sensitive cash flow objective.

Still, whatever one’s personal income investment goals might be, efficient allocation of capital is always an issue. Said somewhat differently, “quality” stocks don’t always make for quality investments.

Say It Ain’t So, Joe

To illustrate how near-term differences can affect longer-term outcomes when it comes to quality stocks, let’s consider recent examples. Using a bit of recent market history as lesson, let’s examine two stocks, Microsoft (NASDAQ:MSFT) and Realty Income (NYSE:O), that have become highly prized retail-investor dividend growth names.

Let’s say two individuals each with $35,000 of investable capital considered shares of MSFT in 2007 shortly before the onset of the financial crisis. Late in the year, Investor “A” decided to buy 1,000 shares at $35 with an accompanying 1.25% yield and $440 of annual income (11 cent quarterly payout).

Investor B for whatever reason – they saw the pending financial crisis…

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