Dividend Growth vs High Yield

Two strategies in one sentence each

High yield: own businesses or funds paying a large share of their value out now.

Dividend growth: own businesses paying a smaller yield today that are growing earnings and lifting the dividend over time.

A simple comparison

Hypothetically, put $100,000 into each. The high-yield holding pays 6 per cent, flat: $6,000 a year. The dividend-growth holding starts at 3.5 per cent, $3,500, and lifts its dividend 7 per cent a year. It passes $6,000 in year nine and pays about $6,400 in year ten.

So the answer depends on time. Someone who needs the income from next month gets nothing from a crossover nine years away. Someone with a long horizon might.

This ignores price changes, franking and tax. Real dividends don't move in straight lines, in either direction.

How high yield fails

• The yield is high because the price has fallen, and the dividend gets cut.
• The business pays out so much it can't reinvest, and slowly shrinks.
• A flat dividend loses buying power every year to inflation.

How dividend growth fails

• You pay a high price for expected growth that doesn't arrive.
• The starting income is too low for current needs, so you sell shares to top it up.
• A long record of increases ends, and the share price is hit hard when it does.

What both need

Earnings and cash flow that cover the dividend, a balance sheet that can handle a bad year, and attention to total return (income plus price change). Neither strategy works if the business underneath is deteriorating.

Many income investors hold some of each: higher yield for today's spending, dividend growth for spending a decade from now.

What to do with this

Split your income holdings into "high yield" and "dividend growth". For each group, note the dividend paid five years ago and today. If income hasn't grown, check whether it's kept pace with inflation.