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Future retirees building passive income streams have seemingly continued to do well. On average, dividend growth will match earnings growth rates over time. Exceptions occur, especially when a company initiates a dividend. However, growth rates typically slow once the payout ratio reaches about 40% to 50%. In general, higher payout ratios lead to lower growth.

Currently, the Dividend Kings, stocks with 50+ years of increases, have a five-year earnings growth rate of 6.0%, while the dividends have risen at an average of 6.18% over the same period. On the other hand, the Dividend Contenders, equities with 10-24 years of increases, have grown earnings at about 7.5% annually while earnings have climbed at 8.8% in the past five years. Notably, the median payout ratio for the Dividend Kings is ~49%, while for the Dividend Contenders it is ~39%.

The yearly payout doubles relatively quickly when the dividend grows at a 6% rate. Even a stock with a modest dividend growth rate like Coca-Cola (KO), a Dividend King, will create substantial passive income if held long enough.

Checking the dividend charts, The firm paid $1.22 per share in 2014, which increased to $1.84 by 2023. But go back to 2010, and the payout was $0.88 per share, meaning the annual dividend multiplied by more than two in 13 years. 

However, if the dividends were reinvested, the income stream would increase more rapidly because the reinvested cash purchases more shares that pay dividends. This action is the power of compounding. Consequently, the aim is to build a diversified portfolio of dividend growth stocks and hold them until retirement.

Stock Market Overview

Recent data from Stock Rover showed a mixed week for the stock market. The Russell 2000 was the only index to see gains for the week. The Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite all declined because of weakness in the Technology sector.

However, 7 of the 11 sectors gained this week. The Energy, Basic Materials, and Utilities sectors were the top performers for the past trading period. However, the Consumer Cyclical, Communication Services, and Technology sectors were the worst performers of the week.

Oil prices gained more than 3% to ~$79. The VIX climbed roughly 10% to 14.26, which is still well below its long-term average. Gold ended the week at ~$2,025.50 per ounce.

(Click on image to enlarge)

Image Source: Stock Rover

The markets have continued to move upward overall due to the economy’s strength. The Nasdaq led the way for the year, followed by the S&P 500, the DJIA, and the Russell 2000.

After starting the year weakly, the Russell 2000 has since recovered and is in positive territory. 8 of the 11 sectors have seen positive returns thus far. The top performers in 2024 have been Communication Services, Healthcare, and Technology, while the Basic Materials, Utilities, and Real Estate sectors have been trailing.

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Image Source: Stock Rover

Our dividend growth investing strategy started the year down. Larger market capitalization stocks have been performing better than smaller ones. The table below shows their performance by category. However, dividends and passive income streams have continued to grow.

Image Source: Stock Rover

Stock Market Valuation This Week

The S&P 500 Index often trades at a price-to-earnings ratio of 27.17X, and the Schiller P/E Ratio is about 33.69X. These multiples are based on trailing twelve months (TTM) earnings. The long-term means of these two ratios are approximately 16X and 17X, respectively. 

Overall, the market is still overvalued despite the recent correction, the bear market, and the recent rebound seen in the markets. Earnings multiples of more than 30X are overvalued based on historical data.

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