Investing in dividend growth stocks is a proven strategy for building wealth. Stock prices of companies that steadily and regularly grow their dividends will see share price appreciation driven by the dividend growth.

Plus, the dividend yield adds to the total return.

And I may just have found the best dividend growth stock money can buy…

Let’s look at the basic math. Let’s say you have a stock with a 5% yield, and the company increases the dividend by 5%. For the yield to stay at 5%, the share price must go up by the increase in the dividend. In this case, you get 5% share price appreciation plus 5% yield for a 10% total return.

The share price to dividend growth relationship disappears into the ups and downs of the stock market. However, when you look at a dividend growth stock over the longer term, five to 10 years, the compounding total return will end up very close to the average dividend yield plus the average dividend growth rate. It almost feels like magic when you own a dividend growth stock for years and suddenly realize it has made you a lot of money.

Most investors who are aware of the power of dividend growth investing focus on stocks like the Dividend Aristocrats. These are blue-chip stocks with years to decades of dividend growth. My problem with these stocks is that they often have relatively low yields (3% to 5%) and meager dividend growth, often in the low single digits.

I like to find dividend growth stocks on steroids, where the dividend growth is in the double digits per year. For my Monthly Dividend Multiplier service, I look for stocks where the yield plus dividend growth adds up to mid-teens compounding total returns.

One of my favorites just announced a 28.6% dividend increase! This company went public three and a half years ago, and the dividend has grown by 125% over that time. Even accounting for the 2022 bear market, the share price has gained 67% since the IPO. Total return since the IPO, including dividends, has been 81%. The current yield is 3.9%.

The stock is Blue Owl Capital Inc. (OWL). Since the IPO, the management and board of directors have committed to strong dividend growth. The business is growing rapidly, and the company rewards shareholders with strong dividend growth. I expect the OWL dividend to grow by another 20% over the next year. Do the math.

— Tim Plaehn

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Source: Investors Alley