The Power of Dividend Growth

While at work today, I decided to do a few quick calculations to look at the effect any dividend growth may have on my HYP. I was very surprised with the findings, so thought I would post them here for the world to read (ok, I know, I’ve no readers at the moment. But one day……)

After doing some research, I found that the average dividend growth since 1900 has been around 5% per year (thanks to Hussman funds great article on dividend growth). I therefore based my calculations around this figure, a starting capital of £100K and a yield of 5% (which is what I’m aiming for in my HYP):

And for comparison purposes, with no dividend growth:

I was totally shocked! remember this is just dividends (& starting capital), it does not take into account any capital appreciation. In first few years the differences are small, however, the magic of compounding soon begins to take effect, resulting in a difference of almost £200K after 20 years. This works out equivalent to 8% per year, although I would expect in practice it would be greater than this due to capital appreciation which I have not accounted for.

I think these figures validate my plan to have a large percentage of my portfolio in a HYP.

My attention then turned to which sectors produce the most growth in terms of dividends. A bit of googling found this helpful site on sector dividend growth rates over 5 years. It contained the following information:

One interesting point was that the the sectors with the lowest dividend growth, typically were amongst those offering the highest initial yields. To me, this says that it’s important to diversify across sectors as your share that initially yields the most may well be overtaken after several years by one of your lowest yielders.

I hope I have gave some people some folks who are conidering constructing a hyp some food for thought.