Dividend Growth Investing (DGI)

MB Capital Strategies Glossary — Updated June 2026

Dividend Growth Investing (DGI) is a long-term income strategy: you buy stocks that pay and grow their dividends over time, hold them, reinvest dividends, and allow Yield on Cost (YOC) to compound to a level that creates passive income sufficient to replace earned income — financial freedom.

The core insight: a 4% dividend yield on a stock that grows its dividend by 8%/year becomes a 19% yield on your original cost after 20 years — without requiring any capital gains.

The Core Formula: Dividend CAGR and YOC

Future YOC = Initial Yield × (1 + Dividend CAGR)^Years

Time to Double YOC ≈ 72 ÷ Dividend CAGR (%)

Example: 5% initial yield, 7% annual dividend growth → YOC doubles in ~10 years to 10%. After 20 years: ~19% YOC. This is the dividend snowball effect — compounding dividend income on a fixed cost basis.

Use the Dividend Growth Calculator to model your own scenarios.

DGI vs. High-Yield Investing: The Trade-Off

Two distinct approaches exist within dividend investing:

Approach	Initial Yield	Growth Rate	Who Uses It
Dividend Growth (DGI)	2–5%	5–15% p.a.	Long-horizon accumulators (20+ years)
High-Yield Income	6–20%	0–5% p.a.	Income-focused, shorter horizon
Hard-Asset Hybrids	4–12%	Cyclical (not linear)	Active income investors like Marco

Traditional DGI focuses on "dividend aristocrats" — companies with 25+ years of consecutive dividend growth. Marco's approach adds a third column: hard-asset stocks (shipping, mining, energy, pipelines) that don't fit neatly into either category but generate enormous cash flows at the right point in the cycle.

Hard-Asset Stocks and Dividend Growth: Marco's Thesis

Conventional DGI wisdom says avoid cyclical dividend payers — their dividends get cut in downturns. Marco's counter-thesis: the right entry price in a hard-asset cycle generates such high initial yields (8–20%) that even a 50% dividend cut leaves you earning more than the S&P 500 average yield.

Real Example — FLEX LNG at Cycle Entry (2023):
Entry price: ~$25/share
Annual dividend at time of purchase: ~$3.50/share = 14% initial yield
Today (2026): Dividends maintained at ~$3.30/share (modest reduction)
YOC on 2023 entry: still ~13.2%
S&P 500 average dividend yield: ~1.5%

Even with a minor dividend reduction, the hard-asset yield outperforms blue-chip DGI by 8–10 percentage points on a yield-on-cost basis. The key was entry at cycle trough, not peak.

Dividend Safety: What to Check Before Buying

A high dividend yield is only valuable if it's sustainable. Marco's checklist for dividend safety:

Payout ratio — under 75% of free cash flow is healthy; 90%+ is risky
Debt/EBITDA — under 3x for most sectors; under 2x for cyclicals
Dividend coverage ratio — earnings or FCF coverage of at least 1.3x
Balance sheet net debt — net cash position is best; high net debt limits flexibility
Earnings direction — is the business growing, stable, or declining?
Management history — have they maintained dividends through previous downturns?

Reinvestment: The Compounding Multiplier

DRIP (Dividend Reinvestment Plan) accelerates YOC compounding by purchasing additional shares with each dividend — which then generate their own dividends. The DRIP Calculator shows exactly how portfolio income grows under different reinvestment assumptions.

At 8% dividend yield with full reinvestment and no price appreciation, a portfolio doubles in income-generating power in approximately 9 years (Rule of 72: 72 ÷ 8 = 9).

YOC ≥8%: The Quality Threshold

On this site, a YOC of ≥8% on the original cost basis is highlighted as a meaningful milestone — it means the investment is effectively returning more than 8% of its purchase price annually in cash. Sectors where this is achievable in the current cycle:

LNG tankers (FLEX LNG: ~9% at current price)
Crude tankers (CMB.Tech, Hafnia: 7–12% at cycle entry)
High-yield BDCs (business development companies: 8–12%)
MLPs / pipelines (Enbridge, Pembina: 5–8% starting, growing)
Mining royalties (Franco-Nevada type): 1–3% but with gold-linked upside

When Dividend Growth Slows or Stops: Red Flags

Not every dividend growth story stays on track. Marco's early-warning indicators for dividend deterioration in hard-asset stocks:

Payout ratio climbs above 85%: the company is paying out more than it can sustainably maintain — often a precursor to a cut
Free cash flow turns negative: the company borrows to pay dividends — unsustainable by definition
Commodity price drops >30% from cycle peak: for hard-asset stocks, this directly compresses margins and cash generation
Net debt/EBITDA rises above 3x: leverage leaves little room for dividend maintenance if earnings dip
Management switches language from "dividend" to "distribution": a subtle but real signal of instability

The shipping sector adds one more layer: when spot rates collapse below operating costs for an extended period, even companies with strong NAV will redirect cash flow to debt service rather than dividends. The 2022–2023 dry bulk market gave a textbook example.

Building a Dividend Growth Portfolio: Practical Framework

Marco's portfolio construction for dividend income combines three overlapping buckets:

Bucket	Stocks	Expected Yield	Expected Growth
Core Compounders	Enbridge, Pembina, TC Energy	5–7%	3–5% p.a.
Cyclical Income	FLEX LNG, CMB.Tech, TORM, Hafnia	7–15%	Variable (cycle)
Special Opportunity	Thungela, B2Gold, Panoro	8–20%	Irregular specials

The Core Compounders provide the steady compounding base. The Cyclical Income bucket generates the headline yield spikes — particularly useful when cycle timing is right. The Special Opportunity positions offer asymmetric upside when commodity cycles turn.

Dividend Growth Benchmarks: How Fast is Fast Enough?

There is no universal "right" dividend CAGR. Context matters:

5–7% CAGR: Steady pipelines/utilities. Reliable but unexciting. YOC doubles in ~12 years.
10–15% CAGR: High-growth dividend payers. Rare in mature markets. YOC doubles in 5–7 years.
Irregular + large specials: Shipping/mining at cycle peak. A single year can deliver 3–5 years of "normal" dividends.

The key insight for hard-asset investors: a 40% dividend yield in Year 1 (cycle peak), followed by a 70% cut in Year 2 (cycle trough), still delivers more total cash over 5 years than a 4% yield growing at 7% compounded — if you entered at the right price.

Not investment advice. Dividend yields, growth rates, and YOC projections are historical examples — future dividends are not guaranteed. Hard-asset dividends are especially cyclical. Always research current financials before investing.

Marco Bozem

Independent hard-asset investor. Covers shipping, mining & energy dividends from a real private-investor portfolio.

About Marco →YouTube