Companies Can and Will Raise their Dividends

Keep Up With Inflation
The attraction of strong companies paying dividends is the fact that many of these companies not only pay a dividend, they increase the dividend. The dividend increase is a reflection of a company that is growing, and it provides the investor with protection against inflation.

Dividend Accounts are Different than Savings Accounts
Savings accounts are stable, predictable, and in most cases insured by the FDIC. They have very little if any risk and for some people, that's all that's needed. That's the good news. The bad news is savings accounts don't pay much in the way of interest, most do not keep pace with inflation, and only see an increase in interest if the bank is hungry for deposits.

Dividends on the other hand can increase as the company's profit increases.

Companies Exist to Grow
Companies exist for two reasons, one mandatory and one discretionary The mandate is to profit, and the discretion is to grow (thereby increasing profits). A company such as Coca-Cola makes a profit, that much is easily verified. But the company is not content with its existing market share, it strives to increase its market share and thereby grow. Its market share may grow by selling more soda, or, it may branch into other products such as bottled water. Regardless of how it grows, the mandate remains: continue to grow.

When an investor buys shares of a company such as Coca-Cola, the investor does so believing that the people who manage the company can figure out a way to grow the company. And more often than not, the managers at well run companies do just that. The investor is not anticipating that the world wants more cola drinks, the investor is anticipating that the ingenuity of the people that produce and sell the cola will create in a larger company. Investment in companies, as opposed to investment in a commodity or other raw asset, is an investment in people, and people's ability to create bigger and better things (or in the case of electronics, smaller and better things).

As Companies Grow So Do Their Dividends
When a dividend paying company is successful at growing, usually evidenced by higher gross and net income, the company often adjusts its dividend pay-out rate (sometimes called a pay-out ratio when measured against earnings) in order to keep pace with the company's growth. For example if a soft drink maker is 5% larger next year because the people running the company were successful at creating growth, it's reasonable to assume that company has more money to distribute to shareholders. Whereas an investor may have been receiving a dividend of, say, 50 cents per share, the company may decide instead to pay its shareholders 52 cents per share. Does this really happen? Yes, it does, and quite often. Johnson and Johnson has raised its dividend every year for more that 40 years. A dividend increase similar to getting a raise from your employer, but unlike a raise which is based on your job performance, you're getting a raise based on someone else's performance. You're benefitting because the group of people at (or example) the cola company did a fantastic job of growing the company.

Keeping Pace With Inflation
Most things tend to get more expensive over time - inflation - and thus our dollars don't buy what they used to buy. Food and gasoline are perfect examples. Most of us can recall a time when it cost far less to fill the grocery bag, or fill the gas tank. When our dollars don't go as far as they used to, it's deemed a loss of purchasing power.

Dividends which are increasing year after year help offset this loss of purchasing power in that the higher dividend payment increases your purchasing power. This is a primary reason why investors nearing or at retirement age pursue dividend paying stocks - they can no longer expect an increase in purchasing power from their wages (i.e. get a raise along with their salary), so instead they look for an increase in their investment income.

Summary
Dividend investing can provide you with a steady stream of income, and certain dividend paying companies can deliver an increase to this income.

They key to successful dividend investing is identifying those companies that not only pay dividends, but are likely to increase the dividend. Companies which have recently increased the dividends are located here.

Contact Your Investment Advisor
Now that you've learned a bit about dividend investing, we urge you to contact a registered investment advisor. Most large banks such as Bank of America or Citibank, and well known brokerages such at Charles Schwab or Fidelity Investments, can guide you further. Loanlane has no affiliation with any of the companies listed above, or any of the companies mentioned on our web site.