Dividendy
Dividend Growth vs. High Yield: Which Is Better?
Key takeaways
- The Dividend Growth Investing (DGI) strategy is built around companies with a low but annually rising yield.
- A high current yield can be attractive, but carries a greater risk of a payout cut.
- Thanks to compounding, a slower-growing company with a 3% yield will overtake one with a stagnant 6% payout after 15–20 years.
- For younger investors in the accumulation phase, DGI is usually more advantageous; the income phase may favour a higher current yield.
Two fundamental dividend strategies face each other: invest in companies with a high current yield, or in companies that grow their payout every year — even if they start lower? The answer depends on your investing phase.
DGI strategy: betting on growth
Dividend Growth Investing (DGI) seeks companies with a history of regularly increasing their dividend. A company pays 2% today but raises it by 7–10% every year. After 15 years you receive a yield on cost that is several times higher than your original outlay — the so-called yield on cost. Dividend aristocrats have been raising their payout for at least 25 consecutive years — a powerful testament to financial stability.
High-yield strategy: income right away
If you need income immediately (for example in retirement), a 6% yield today is tempting. But a high yield carries risks:
- It may result from a falling share price (see dividend trap)
- A payout ratio close to 100% reduces the company's resilience
- The payout may be cut in an economically weak year
When to use which approach
In the accumulation phase (building wealth), the DGI approach works well — it combines with reinvestment and the effect of compound interest. In the income phase (drawing down), a focus on higher current yield can make sense, but sustainability must still be verified through payout ratio.
ETFs for both strategies
There are ETFs focused on dividend aristocrats or companies with growing payouts for the DGI approach, and funds focused on utilities, real estate, or global dividend stocks for the high-yield approach. A comparison of both can be found in the ETF navigator.
FAQ
What is the DGI strategy?
Dividend Growth Investing — investing in companies that raise their dividend every year. The goal is not maximum yield today but growing income over time through regular payout increases.
Is a 6% yield today better than 3% with annual growth?
It depends on your time horizon. At an 8% annual growth rate, the 3% yield overtakes the 6% yield in approximately 15 years. In the accumulation phase, DGI therefore typically leads to higher total income.
How do I know whether a yield is sustainable?
Check the payout ratio (ideally below 70%), earnings and cash flow trends. And dividend history — a company that has been raising its dividend for 10+ years has a proven financial discipline.