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Dividend Growth is the foundation of Headwaters Investment Strategy. Dividend growth investing provides investment income that will continually increase every year while preserving the opportunity for principal growth. This gives clients an all-weathered strategy that outperforms in both bull and bear markets, in rising or declining interest rate environment, and in low or high volatility periods. Our strategy seeks to find the perfect harmony between growth and value.

The Compounding Effect of Dividend Growth:

"The most powerful force in the universe is compound interest" - Albert Einstein

  • Corporate Indicators
  • Inflation
  • Power of Compounding

Corporate Indicators

Dividend distributions act as a constant reminder to management who really owns the company, the public shareholders. They keep management focused on continuing to create and maintain shareholder value. A rising dividend is the best predictor of future corporate performance.

The long-standing payment of the dividend is a great indicator of the stability of a company’s business model. Dividends are an expression of management’s confidence in the present and a rising dividend is a very strong expression of management’s confidence in the future. As a strong part of corporate culture, a rising dividend is a clear signal from management that they can maintain into the future the current performance of the company.

Inflation

Individuals approaching retirement are typically sold a wide array of fixed income investments such as annuities, bonds, bond funds and many others. While these investments do provide consistent and dependable income there is one very noteworthy disadvantage, they do not account for inflation.

Stocks that pay rising dividends provide the best inflation proof source of income. Over the past 85 years dividend growth has exceeded inflation approximately 2% annually. While on the surface it may seem that inflationary impact may not be that severe, even a modest annual inflation rate of 3% corresponds to a 24% decline in purchasing power after only 9 years.

Power of Compounding

Albert Einstein is quoted as saying “The most powerful force in the universe is compound interest.” The power of compounding acts as the primary driver of our dividend growth strategy. Annually increasing dividends is the compounding force that multiplies our client’s cash flows as well as the underlying value of each of their investments driving market beating total portfolio returns.

Compound interest simply put is when the interest from your initial investment starts earning interest. Similar to the effects of inflation compound interest appears to happen slowly at first but as time progresses its power will have a major impact on your investments.

A dramatic example of the powerful effects of compounding comes from George Gilder.

“The Emperor of China was so excited about the game of chess that he offered the inventor one wish. The inventor replied that he wanted one grain of rice on the first square of the chessboard, two grains on the second square, four on the third and so on through the 64th square. The unwitting emperor immediately agrees to the seemingly modest request. But two to the 64th power is 18 million trillion grains of rice — more than enough to cover the entire surface of the earth. The clever inventor did not gain all the rice in China; he lost his head.”


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