Income Growth and Capital Appreciation Strategy

One of my preferred public equity investment strategies is Income Growth and Capital Appreciation, along with Wide Moat quality value growth compounders. This strategy focuses on investing in high-quality businesses and assets that consistently increase their earning power and dividend payouts over time. As these investments grow their intrinsic value, they also provide capital appreciation. The key is to buy these high-quality investments are at attractive valuations, especially when they are temporarily out of favor.

Peter Lynch, in his book One Up on Wall Street, coined the term “growth bonds” for such investments. Unlike traditional bonds with fixed returns, securities with growing dividends can provide increasing income over time, offering better protection against inflation. Dividends play a pivotal role in enabling companies to outperform their competitors with less risk. The ultimate objective is to achieve dividend growth that exceeds the inflation rate.

The Strategy in Practice

This strategy is particularly well-suited for those who would like to generate income have it grow and have it appreciated. It can be advantageous for non-taxable accounts. Estate planning can leverage this approach to ensure beneficiaries generate income without needing to sell assets.

Dividends offer absolute returns, distributed quarterly, providing a stable income stream. This stability offers protection during market corrections, as dividends can be reinvested into undervalued, high-quality companies. Moreover, during recessions, declining interest rates often make dividend-paying stocks more appealing to investors seeking yield. These characteristics make dividend-paying stocks more defensive compared to the broader market.

Having a steady income stream during market corrections enables investors to capitalize on undervalued opportunities. My friend and investment advisor, Michael Nowacki, attributes some of our good performance to being highly selective, opportunistic, and open-minded. This strategy cash flow element is a critical enabler for seizing opportunities.

Why Invest in Dividend Growers?

Dividend growers offer a compelling combination of steady income and capital appreciation. Here are the key benefits:

• Consistent Income: Dividend-paying stocks provide reliable cash flows, essential for individuals and foundations needing regular income to cover expenses. This ensures absolute returns, irrespective of market fluctuations.
• Defensibility: These stocks often outperform during recessions, offering resilience against broader market volatility. Additionally, they provide cash that can be reinvested during market downturns.
• Financial Strength and Quality: Dividend growth is a hallmark of a company’s financial health. Studies show that dividend-growing companies frequently outperform broader market indices, such as the S&P 500.

Conclusion

We are opportunistic, prioritizing investments in high-quality assets at attractive valuations, with sustainable growth in “distributable cash flow.”

By avoiding cyclical companies prone to volatility and favoring businesses with consistent cash flow growth, the Income Growth and Capital Appreciation Strategy offers a path to steady income, defensiveness, and business quality. This strategy enables investors to achieve robust performance while navigating market fluctuations effectively, ensuring both income generation and sustainable capital appreciation over time.