Why Every Value Investor Should Consider Dividend Growth Investing?
A solid growing base helps you stay disciplined where it is required
Dividends are important to a value investor for many reasons.
I believe that existence of a dividend gives the financial statements more credibility. Cash, after all, is hard to fake.
A growing dividend is even greater vote of confidence in the company’s shareholder orientation.
Finally, as value investors, we know that we will have to wait for the market to recognize its errors and bring the stock to its fair value. We do not know how long this wait will be. Getting paid while waiting makes it easier to be disciplined, and, it helps reduce the opportunity cost of the capital.
Despite all these benefits, dividends are not a requirement in value investing. Many great value investments do not pay dividends.
If you have been value investing for a while, you undoubtedly know how hard it can be at times to stay disciplined when the market continues to disagree with your thesis.
The Dividend Growth Strategy
Dividend Growth strategy provides two things that all investors seek:
A reliable and consistent compounding vehicle, and,
Psychological comfort that your investments are paying off, even as your other value investments may seem to be comatose
Once the dividend growth portfolio is set up and in flow, it continues to generate a growing stream of dividend income, month after month and quarter after quarter. If you reinvest the dividends in your portfolio, then this steam of dividend income grows even faster.
The growth in this dividend income comes from 2 different sources
Reinvested dividends buy new shares. As share counts grow, the dividends start compounding
We select for companies that are likely to increase the dividend payments over time. This adds another layer of compounding to the dividend income
The progress seems slow at first but with time the portfolio starts to gather pace and snowball.
Why Dividend Growth Is My Foundation
Dividend growth investing provides something that deep value often can’t: predictable income and peace of mind. This forms the base of my investment practice.
If I choose to, I can use a portion of the dividends earned every month and redirect them to my Small Cap Value portfolio where I seek stocks with asymmetric returns.
The upside in the Small Cap Value is much higher. It is also uneven. We may have a bumper month in which a few stocks in the portfolio mature at the same time. We may also have a string of months when nothing seems to happen.
If Small Cap Value was all I did, I know there will be moments when I am impatient. With a solid and growing base established, I am less tempted to stray,
This is the philosophy behind my Dividend Fortress portfolio: focusing on high-quality dividend growers, often Dividend Aristocrats and Kings, but also select companies with strong balance sheets and rising cash flows that may not yet have decades-long track records.
The Valuation Layer in Dividend Fortress
While many dividend investors simply buy and hold regardless of price, I believe valuation matters. Even great businesses can underperform if purchased at extremes. In Dividend Fortress, I add a valuation layer to my stock selection by looking at payout ratios, dividend growth rates, forward yield-on-cost, and fair value estimates before committing capital.
This approach differs from my deep value strategy. Here, valuation discipline ensures I buy quality at a fair price, rather than chasing absolute bargains with higher business risk. The goal is to maximize reliable compounding without sacrificing quality.
This is clearer in my reinvestment strategy.
Automatic reinvestment is favored by many dividend growth investors. I do not do that. It is not wise to keep pouring money in a stock that may be touching the peak of its valuation.
Instead, I pool the dividend income in cash, and then reinvest in the stock in the portfolio that offers the greatest value. This could be in the form of discount to the fair price, or yield or a growing business momentum.
In my experience, avoiding buying high and replacing that with seeking discounts will add a few extra percentage points to your average annual return over time.
How These Portfolios Work Together
The cash flow from Dividend Fortress provides flexibility. Monthly dividends pool into cash, which I can reinvest in undervalued dividend growers or, when the opportunity arises, funnel into deep value ideas. This creates a barbell structure: one side anchored in stability, the other primed for opportunistic growth.
The result is a strategy that doesn’t rely on predicting macroeconomic trends or market timing. Quality and valuation provide the margin of safety, while compounding does the heavy lifting.
See the Full Dividend Fortress Portfolio
This article outlines the philosophy, but the real value is in seeing how it’s applied. Paid members get access to the full Dividend Fortress portfolio including current holdings, allocation weights, and my ongoing research into undervalued dividend growers.
If you’re looking for a dividend growth strategy with a valuation edge, combined with insights from deep value investing, this is where you can follow along.