Back in December 2012, I launched the Inflation Protected Income Growth Portfolio. It was a real-money investment portfolio that attempted to invest in a way to provide dividend-like income that increased in value faster than inflation every year.
While the editorial feature around the portfolio shut down, the invested capital remains my own money. Since I believe in the strategy behind it, I'm continuing to operate the account behind that portfolio in largely the same way.
When it comes to providing that income growth, 2023 was a great year for the account. Not only did its income beat the official inflation rate, but its dividend growth trounced the S&P 500's, as measured by the SPDR S&P 500 ETF (NYSEMKT: SPY), which seeks to track that index. Here's how this strategy trounced the S&P 500 by that dividend growth measure this year.
Image source: Getty Images.
How did the competition wind up?
The table below shows the quarterly dividends declared by the SPDR S&P 500 ETF in 2022 and 2023.
Quarter | 2022 | 2023 | Change |
|---|---|---|---|
January, February, March | $1.366 | $1.506 | 10.25% |
April, May, June | $1.577 | $1.638 | 3.87% |
July, August, September | $1.596 | $1.583 | (0.81%) |
October, November, December | $1.781 | $1.906 | 7.02% |
Total | $6.320 | $6.633 | 4.95% |
Data source: Yahoo! Finance.
That tracking ETF managed to hand its investors a respectable 4.95% increase in payments between 2022 and 2023. Compared to the Consumer Price Index's 3.1% reported rise in inflation over the past 12 months, the index certainly turned in a respectable performance from a dividend growth perspective.
Despite that solid performance by the index, the account that holds the former Inflation Protected Income Growth Portfolio performed more than twice as well from that perspective. The table below shows the cash dividends received each quarter over the same two years, including ones declared for payment in December 2023 though not yet paid.
Quarter | 2022 | 2023 | Change |
|---|---|---|---|
January, February, March | $711.55 | $811.27 | 14.01% |
April, May, June | $742.83 | $819.20 | 10.28% |
July, August, September | $781.78 | $837.01 | 7.06% |
October, November, December | $793.95 | $872.77 | 9.93% |
Total | $3,030.11 | $3,340.25 | 10.24% |
Data source: The brokerage account of the former Inflation Protected Income Growth Portfolio.
From an operational perspective, no money has been added to or removed from that account since its launch, and all taxes from the investment returns have been paid from other funds. Dividends received by the account have been retained as cash and opportunistically invested as conditions allow.
Where the account's outperformance came from
There are two primary reasons why this account saw its dividend income grow faster than the overall S&P 500's. First and foremost, it was designed to seek out dividend growth. To be included in it, a company had to pay a dividend, have regularly increased its dividends, and look capable of continuing to increase its dividends in the future.
Contrast that with the S&P 500, where the primary requirement to be included is to be one of the 500 largest U.S.-based publicly traded companies.
The account's set of requirements led to picks like Texas Instruments (NASDAQ: TXN), which was bought for the account in January 2013. At the time, Texas Instruments had recently increased its dividend to $0.21 per share per quarter, which was the company's tenth increase in the previous nine years.
In 2023, Texas Instruments continued its trend, boosting its quarterly payout to $1.30 per share, marking 20 straight years of increases. With a payout ratio of around 65% of the company's earnings, Texas Instruments will need to rely on continued operating growth to support its continued rising dividends. As analysts expect it to be able to increase its earnings by around 10% annualized over the next five years, it has the potential to continue its dividend streak if that growth materializes.
The second reason is the fact that this account keeps its dividends hanging around, prepared to reinvest when the opportunity arises. That cash provided a decent chunk of the $12,000 I invested in Fifth Third Bancorp earlier this year, just before it also increased its dividend.
Similar to Texas Instruments, I saw Fifth Third Bancorp as a company with a decent history of dividend growth and a good reason to believe it could continue. It provided a very clear example of how a paid and growing dividend, reinvested in companies that also look capable of paying and increasing their dividends, could ultimately drive powerful compounding.
Is this strategy for you?
As awesome as this dividend growth focused investing strategy has performed at its primary goal in 2023, it has its own share of risks. Dividends are never guaranteed payments. If a company cuts its dividend, its share price will often fall as well. That combination could cause you to lose both your dividend income and the capital that provided it, making it very difficult to recover from a cut.
Because of that reality, it's important to keep an eye on companies' payout ratios, growth prospects, and balance sheets. Those factors play a key role in determining whether a dividend can be maintained.
Any investor looking to follow a similar strategy should prepared to watch those factors like a hawk. Being ready to sell before a cut happens can be the difference maker when it comes to protecting your capital.
Still, as this year showed, when it's working well, a dividend growth focused approach can provide an increasing income stream. To get those payments, though, you must be invested in the stocks that pay them before they go ex-dividend and hold at least until their ex-dividend dates.
If you're interested in this type of investing strategy, make today the day you get started seeking out companies that might fit. If you wind up with this type of market-trouncing dividend growth in your own portfolio, you'll be glad you did.
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Chuck Saletta has positions in Fifth Third Bancorp and Texas Instruments. The Motley Fool has positions in and recommends Texas Instruments. The Motley Fool has a disclosure policy.
