Strategie
Dividend Growth Strategy Step by Step
Key takeaways
- The DGI strategy emphasises a growing dividend, not the maximum immediate yield.
- Companies that have raised their dividend for 10–25 years are proven to be stable and disciplined.
- DRIP (dividend reinvestment) multiplies compounding without transaction costs.
- Pitfalls include: too high a yield as a warning signal, and overconcentration in utility and consumer staples sectors.
- In the Czech Republic, dividends are taxed at 15%; for foreign companies, withholding tax and the relevant tax treaty apply.
The Dividend Growth Investing (DGI) strategy does not maximise immediate dividend yield — it systematically builds a portfolio of companies that regularly raise their dividend, so that the income base grows over time without the need to sell shares.
Why a growing dividend, not a high yield
Companies with a 7–9% yield are either exceptionally unusual or in trouble. A high yield can signal that the market expects a dividend cut or cancellation. DGI therefore prefers companies with a 2–4% yield but a consistent annual increase of 5–10%.
Example: a company pays 2% today and raises its dividend 8% per year. In 15 years, your effective yield on cost is over 6% — with none of the risk associated with chasing a "cheap" high-yield stock.
How to select companies
- Dividend growth track record: a minimum of 10 years, ideally 25+ years (dividend aristocrat).
- Dividend payout ratio: below 60% for equities (companies have room to keep raising).
- Free cash flow coverage: the dividend should be covered by free cash flow, not just accounting earnings.
- Debt: Net debt/EBITDA below 2–3× — excessive leverage threatens the dividend in a recession.
Sectors and diversification
DGI portfolios tend to be overconcentrated in defensive sectors — utilities, consumer staples, healthcare. This works in a recession, but in a rising market the portfolio lags. Add technology companies with a shorter but strong dividend track record (Microsoft, Apple). We write about dividend aristocrats in more detail here.
Tax side in the Czech Republic
Dividends in the Czech Republic are subject to a 15% withholding tax. For foreign companies, the final taxation depends on the double-taxation treaty. For a DGI investor, an accumulating ETF is therefore more tax-efficient — it reinvests gains without immediate taxation and allows the use of the time test. The difference is explained in more detail in the article on accumulating vs. distributing ETFs.
FAQ
What is a dividend growth strategy?
DGI (Dividend Growth Investing) builds a portfolio of companies that raise their dividend year after year. The emphasis is on a growing income stream, not the maximum immediate yield. Over time, yield on cost rises without the need to sell shares.
What is a dividend aristocrat?
A company that has raised its dividend for at least 25 consecutive years. The S&P 500 Dividend Aristocrats index contains around 60–70 such companies. Their consistency reflects a stable business and disciplined capital allocation.
How are dividends taxed in the Czech Republic?
By a 15% withholding tax. For foreign stocks it depends on the double-taxation treaty. For example, the US withholds 15% (under the Czech-US treaty), so no top-up is owed in the Czech Republic. An accumulating ETF is the more tax-efficient option.
What is yield on cost?
Your effective dividend yield relative to your original purchase price. If you bought shares yielding 2% and the company raises it every year, after 10–15 years your YoC significantly exceeds the market yield available to new buyers.