The word Growth is the central word in the phrase Dividend Growth Investing, yet “DGI” is often looked at as a stodgy strategy focusing on low growth, “widow and orphan” type of investments. This mis-characterization is unfortunate, because it can cause younger and/or returns-focused investors to bypass the strategy in favor of more “exciting” opportunities.

Yes, there are all kinds of boring, higher yielding, low growth companies that are considered dividend growth stocks, but there are plenty of other higher growth companies that fit under the “DGI” umbrella as well.

Growth Vs. Yield Relationship

Growth and income aren’t mutually exclusive;  there are plenty of companies growing at a double-digit rate that still offer a dividend for shareholders. While it is rare to find high growth along with a high yield, even a low starting yield can grow into a significant future income stream over the years.

Compounding is a tremendous force, especially when one is talking about double-digit growth rates. For example, a stock with just a 2% initial yield, growing at 12.5% per year, will roughly double its income potential every 5 years when dividends are reinvested. A young investor with 20, 30, or 40 years until retirement can see several doublings of their dividends, turning that initial 2% yield into  substantial future income.

This relationship between initial yield, growth and future income potential can be seen in this spreadsheet matrix I built:

To use the chart, simply pick out an initial yield from the top row, and then a growth rate from the left column. The cell where they come together shows the expected yield on cost “YOC” at the end of 10 years. For example, a 3% initial yield growing at 10% per annum provides an expected YOC of 10.2% after ten years. This is close to the same result of a 5.5% initial yield growing at 1% per year.

Here is a similar chart showing expected total returns with dividends reinvested:

From the earlier example we know a 3% yield growing at 10% produces roughly the same income as the 5.5% yield growing at 1% after a decade. However, this chart shows that it produces significantly higher total returns for an investor, turning each dollar into $3.49 while the slower grower turns into just $1.89.

Real-World Dividend Growth Examples

This relationship can be seen in real life through the assistance of FAST Graphs. FAST Graphs is an excellent resource, and is the only product that I subscribe to monthly. It provides the ability to quickly look at the long-term performance of a company for both earnings and dividends.

For example, we can look at Ross Stores Inc. $ROST, which has grown earnings at a 16.0% CAGR and dividends at a 24.9% CAGR over the last decade.

This growth (with dividends reinvested) turned a $10,000 investment into over $68,000, and turned an initial yield of just 1.4% into a yield on cost of nearly 10%. Ross Stores’ high EPS and dividend growth rates makes it one of the best DGI stocks to own, and this characteristic can be found in many other high quality companies in the stock market.

For example, Stryker Corp. $SYK is a medical devices company that has grown earnings at a 15.35% rate and the dividends at a 23.3% rate over the last twenty years.

This incredible growth turned a minuscule 0.2% initial yield into an impressive 14.5% yield on cost after two decades, and turned a $10,000 investment into nearly $98,000.

A person just needs to find a few stocks like this to become very rich over time, especially if they can identify them early on, and have the right mind-frame to hold them for the long run.

High Dividend Growth Investments

Companies like this exist in nearly every sector. Companies that have continued to grow earnings and dividends at double-digit rates for 5, 10, 20, even 30 years. Companies that have made investors fortunes through the incredible force of compounding earnings and dividends.

Here are some of my favorite high dividend growth stocks from the different sectors:

Healthcare: Abbott Laboratories $ABT, Amgen Inc. $AMGN, Becton Dickinson & Co. $BDX, Johnson & Johnson $JNJ, Medtronic $MDT, Stryker Corp. $SYK, UnitedHealth Group $UNH

Consumer Discretionary: Comcast Corp. $CMCSA, Walt Disney Co. $DIS, Home Depot $HD, Lowe’s Companies $LOW, Nike $NKE, Ross Stores $ROST, Starbucks $SBUX, TJX Companies $TJX, Tractor Supply Co. $TSCO, VF Corp. $VFC

Consumer Staples: Church & Dwight $CHD, Costco Wholesale $COST, CVS Health $CVS, Hormel Foods $HRL, Hershey Company $HSY, McCormick & Company $MKC

Energy: EOG Resources $EOG, Enbridge Energy $ENB, Marathon Petroleum $MPC, Phillips 66 $PSX,

Financials: Amperiprise Financial $AMP, BlackRock Inc. $BLK, Intercontinental Exchange $ICE, Primerica Inc. $PRI, T Rowe Price Group $TROW

Industrials: A.O. Smith Corp. $AOS, Cummins Inc. $CMI, Canadian National Railway $CNI, Honeywell International $HON, Lockheed Martin $LMT, Norfolk Southern $NSC, Union Pacific $UNP,

Materials: Sherwin-Williams Co. $SHW, Air Products & Chemicals $APD

Real Estate: American Tower Corp. $AMT, Digital Realty Corp. $DLR, Coresite Realty $COR, Crown Castle International $CCI

Technology: Apple Inc. $AAPL, Accenture $ACN, Automatic Data Processing $ADP, Broadcom $AVGO, Intuit $INTC, Nvidia $NVDA, Mastercard Inc. $MA, Microsoft $MSFT, Texas Instruments $TXN, Visa Inc. $V

Utilities: American Water Works $AWK, CMS Energy $CMS, DTE Energy $DTE, Eversource Energy $ES, NextEra Energy $NEE, Sempra Energy $SRE, UGI Corp. $UGI, WEC Energy Group $WEC

Needless to say there are plenty of ideas to choose from. Remember, that just because a stock may not pay much of a dividend now, doesn’t mean it won’t produce an enormous amount of returns over time. In my opinion, dividend growth investors sometimes focus too much on the dividend and not the growth component of the equation, which can cause them to miss out on both capital gains and income down the road.

Personally, I try to find companies that operate in a stable and consistently profitable manner, and can grow at a double-digit rate over long periods of time. These are the types of companies that can produce tremendous income potential and capital appreciation if held over multiple decades, which happens to be my investment time-frame.

I’ve written several articles on Seeking Alpha over the years highlighting these types of investments, here are a few of my favorites:

Top 10 Growth Stocks From The Dividend Challengers List

Top 10 Growth Stocks From The Dividend Contenders List

Finding The Growth In DGI: Dividend Champions

Don’t Let Low Dividend Yields Keep You From Investing In These Great Companies

Young Investors – Why Increasing Risk Is A Bad Idea For Your Portfolio

10 Over-Achieving Dividend Contenders

For other investment ideas, check out my sector-based WATCH LISTS.