🧠 "If you're in a hurry, walk slowly." - Confucius
Many investors dream of early retirement - financed by regular dividend payouts. But which strategy will get you there faster? A high dividend yield or a consistent dividend increase? The answer depends heavily on individual goals, the investment horizon and personal circumstances.
🔹 Dividend yield
The dividend yield indicates what percentage of the current share price is paid out as a dividend. Companies with a high dividend yield often pay out a large proportion of their profits and cash flow to their shareholders. This is particularly common for large companies and in sectors such as utilities, telecommunications or REITs.
🚨 Attention:
A high payout may mean that the company has hardly any growth opportunities or does not know how to use the capital efficiently. There is also a risk of dividend cuts in difficult economic times.
🔹 Dividend increase
Dividend growth measures how strongly a company's distributions grow over the years. Companies with a high dividend growth rate often start with a lower initial yield, but offer a higher personal dividend yield in the long term.
✅ Advantages:
These companies are usually smaller, grow faster and only pay out a moderate proportion of their profits. This leaves more capital for expansion and future dividend increases. In the long term, investors benefit not only from rising dividends, but often also from a better share price performance.
Which strategy is better for early retirement?
There is no one-size-fits-all answer - the choice depends on the individual situation:
✅ Short-term income strategy:
Those who already want to live off dividends today are more likely to focus on companies with high dividend yields.
✅ Long-term wealth accumulation:
If you have the time, you can focus on dividend growth to generate a strong passive income in the long term.
My personal approach
I pay attention not only to the dividend yield and increase, but also to sustainable growth in profits and sales. It is also crucial that the dividend is covered by free cash flow. For investment-intensive sectors, I use the operating cash flow as a benchmark, for REITs the funds from operations (FFO).
Practical example: $UPS (-0,28 %)
vs. $ODFL (-1,16 %)
🚚
To compare theory with practice, I compare UPS and ODFL - two industry-related companies from the transportation sector.
📌 UPS stands for a company with a higher dividend yield.
📌ODFL on the other hand, stands for a company with a higher dividend increase.
As can be seen from the charts, the pattern described is confirmed:
📉 UPS offers an attractive dividend yield in the short term, but in view of the weak share price performance, this could be seen more as "pain and suffering".
📈 ODFL on the other hand, is growing more dynamically, continuously increasing its dividend and at the same time showing a significantly better and more stable share price performance.
➡️ Conclusion:
At first glance, the high dividend yield strategy may appear more tempting, as it generates higher payouts in the short term. However, a look at the long-term development shows a different picture.
Anyone who has invested in the last 10 years on $UPS (-0,28 %) have actually been able to achieve a higher cumulative dividend yield.
But over a period of 20 years the ratio is reversed: Due to the steady increase in dividends, the payout grows at $ODFL (-1,16 %) so strongly that the dividend yield calculated on the original investment is significantly higher than for $UPS (-0,28 %) .
In addition to the higher dividend income, investors in $ODFL (-1,16 %) also benefit from a significantly better and more stable share price performance, which further increases the overall return potential. This example shows that it pays off in the long term to invest in companies with solid dividend increases and sustainable growth.
💬 Which strategy do you prefer? High initial yield or long-term dividend growth? Let us know in the comments! 🚀💰
Disclaimer:
This analysis is for information purposes only and does not constitute investment advice or a recommendation to buy/sell financial instruments. It is not an invitation to trade in securities. Historical performance is not an indicator of future results. Investments in securities involve risks and should be carefully considered.
⚠️ Important note: The selected examples $UPS (-0,28 %)
and $ODFL (-1,16 %) serve to illustrate extreme contrasts between high dividend yields and high dividend growth. They are deliberately chosen to highlight the difference, but do not represent the entire market or every possible investment strategy.
