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A few people have been asking about DRIPs, and the company recently raised the dividend payout so I thought this an appropriate time to bring up the importance of dividend growth.

The importance of dividends is something often missed by short term investors, but dividends have made up roughly half of investment return for shareholders over the years.

What should you look for when selecting a company for dividend growth? Well, a big dividend yield isn't the answer. High yield can often indicate a company that is in trouble, or at least trying too hard to compensate for its slower growth prospects by offering a larger dividend to attract investors.

Much better to look at the rate-of-growth in terms of dividend increases. You not only want a company that is growing its dividend nicely, but also a company that has the ability to continue growing that dividend at a superior rate.

This means a company that is reinvesting earnings in the development of new products. It means a company that excells at introducing new products and derives a large percentage of its profits from those more recent introductions.

Sound familiar? That's Johnson & Johnson:

"...imagine the earning power of a company that grows so much as to increase its payout (each year). In fact, this is what Johnson & Johnson did every year for 38 (now actually 40 years) years (since 1966)!

If you had bought the stock in the early 1970s, the dividend yield that you would have earned between then and now on your initial shares would've grown approximately 12% annually. By 2004, your earnings from dividends alone would have given a 48% annual return on your initial shares!"


That's the power of dividend growth.

http://www.investopedia.com/articles/basics/04/072304.asp

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