### Mastering Dividend Growth Investing with the Dividend Triangle
Dividend growth investing serves as a formidable approach to accumulating long-term wealth; however, not every dividend stock merits your investment. To differentiate robust performers from the underperformers, seasoned investors utilize the **Dividend Triangle**—a straightforward but powerful technique for recognizing companies with sound financial health and the potential for sustained dividend growth over the long haul.
## What Is the Dividend Triangle?
The Dividend Triangle consists of three essential financial metrics that gauge a company’s capability to maintain and amplify its dividends:
1. **Revenue Growth** – A company’s revenue should persistently rise on an annual basis. Increasing revenue signifies business growth, enhanced market dominance, or effective pricing tactics. In the absence of consistent revenue growth, a company might face challenges in upholding or increasing its dividend payments.
2. **Earnings Per Share (EPS) Growth** – EPS represents a company’s profitability and its efficiency in turning revenue into profit. While revenue indicates top-line growth, escalating EPS reflects robust financial governance, vital for maintaining dividend distributions.
3. **Dividend Growth** – The last component of the triangle evaluates a company’s history of elevating dividends. A consistent increase in dividend payouts hints at financial reliability, healthy cash flow, and a dedication to shareholder rewards. Regular dividend increases also assist investors in combating inflation.
By examining these three metrics in unison, investors gain a holistic understanding of a company’s financial vitality and its capacity to provide dependable dividend growth over time.
## Gain Access to 300 Stocks with a Favorable Dividend Triangle
Through the Dividend Triangle, I have curated a list of around 300 firms that have shown consistent five-year growth in revenue, EPS, and dividends. The **[Dividend Rock Stars](https://thedividendguyblog.com/dividend-rockstar-list/)** list is refreshed monthly, serving as an excellent foundation for dividend investors. Do you want immediate access? Just input your name and email to receive the list directly in your inbox.
## The Importance of the Dividend Triangle
Dividend investing transcends merely pursuing high yields. A stock that presents an appealing yield might be experiencing financial difficulties, risking a cut or complete removal of its dividends. The Dividend Triangle aids investors in evaluating a stock beyond its present payouts, confirming that it possesses the financial robustness to maintain and elevate its dividends.
For example, a company with increasing revenue and EPS yet lacking in dividend growth might indicate potential for future increases. In contrast, a high-yield stock with diminishing revenues could soon encounter dividend reductions. The Dividend Triangle provides a thorough financial overview, enabling investors to sidestep value traps.
## Analyzing the Dividend Triangle
### 1. **Revenue Growth**
Search for companies exhibiting steady revenue growth over the past five years. Fluctuations in revenue may suggest instability in a company’s business structure or susceptibility to market variations.
**Example:** Apple has shown remarkable revenue growth due to its innovative approach, strong brand loyalty, and pricing power.
### 2. **EPS Growth**
A company’s EPS should increase by a minimum of 5% annually over five years. This indicates not only rising sales but also effective cost management and profitability.
**Example:** Microsoft has consistently expanded its EPS, driven by its transition to cloud computing and high-margin software offerings.
### 3. **Dividend Growth**
Look for companies that are growing their dividends by at least 5% per year. This ensures that dividend income keeps pace with inflation, thereby safeguarding your purchasing power.
**Example:** Visa has continually increased its dividends by double digits, reflecting its solid business model and growth trajectory.
## Utilizing the Dividend Triangle in Investment Choices
Consider the following scenario when choosing between two dividend stocks:
– One stock offers a **6% yield** but has stagnant revenue and earnings.
– The other presents a **2% yield** yet demonstrates consistent growth across all three Dividend Triangle metrics.
Although the stock with the higher yield might appear attractive, it could be susceptible to future dividend cuts if its financial performance deteriorates. The second stock, despite its lower yield, is far more likely to offer sustainable, growing income. Long-term dividend investors should prioritize quality and growth over immediate yield.
I’ve elaborated more about **[low vs. high-yield stocks in this article](https://thedividendguyblog.com/dividend-income-for-life/)**.
### Important Considerations and Constraints
While the Dividend Triangle serves as a valuable tool, it’s critical to enhance your analysis with a deeper examination of a company’s business model, competitive landscape, and industry outlook.
For sectors such as **Real Estate Investment Trusts (REITs)**, modifications to the model are necessary:
– **Revenue Growth → Same-Property NOI Growth & Occupancy Rate**
– **EPS Growth → AFFO per Share Growth**
– **Dividend Growth → AFFO Payout Ratio & Dividend Stability**
## Case Study: Alimentation Couche-Tard (ATD.TO)
Alimentation Couche-Tard, a global frontrunner in convenience stores, has exhibited robust revenue and EPS growth over the