Posted by BM on March 5, 2021
“As a company’s cash flow (earnings, dividends) increases the firm becomes more valuable, intrinsic value rises (retained earnings) and thus the company’s stock price goes up.”
-Tom Connolly
It was only over the last few years that I noticed my dividend and price growth correlating very closely on my personal portfolios. I had always looked at historical growth rates to screen for candidates to add to my portfolios but to see it happening on portfolios I had built on my own was a welcome discovery.
The link below is an excellent article on the topic of ‘rising income drives rising prices concept’.
https://northstarinvest.com/the-importance-of-dividend-growth/
“We know from research on the stock market in general and from research we have conducted on dividend growth stocks that there is a high correlation between the growth of the dividend and the growth of a stock’s price. * Our research indicates that over 10 to 12 year cycles, the correlation between dividend growth and the stock price appreciation has been approximately 80% and over 25-year cycles it’s close to 90%.
That essentially means as the dividend grows, the price grows at roughly a similar pace over the long term. That’s why we focus so much on the dividend growth. If we do that right, we are highly likely to see the stock’s price appreciate as well. This is where the control aspect of the portfolio comes into play. Many investors feel as if the stock market is a mysterious beast and that they are simply subject to the whims of market returns. But if you link the value of your stocks to the income produced and focus on building that income, you are also highly likely to see the price appreciate as well.”
*Ned Davis Research
Here are the 10YR Compound Annual Returns of ‘The List’. 10YR_CAGR-The List-01-01-2021
Notice the 10YR Averages of the compound annual dividend growth rate (CAGR 10Y DG) and compound annual price growth (CAGR 10Y PG) of ‘The List’ in this spreadsheet. The evidence is hard to refute…as the dividend grows, the price grows at about the same rate.
Getting the dividend growth right tilts the deck in our favour and increases the probability of an above average total return (CAGR 10Y TR).
