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When it comes to generating passive income through dividends, many investors focus solely on a stock’s current yield. However, a company’s dividend growth rate can be just as important, if not more so, in determining the long-term income potential of an investment. Let’s compare two companies with vastly different dividend growth strategies and see how they stack up over a five-year period.

Target Corp vs. Annaly Capital Management, Inc

Five years ago, Target Corp. (NYSE:TGT) offered a modest dividend yield of 3.3%, with a quarterly payout of $0.64 per share. At the time, the stock was trading at $77.42. In contrast, Annaly Capital Management, Inc. (NYSE:NLY), a mortgage real estate investment trust (mREIT), boasted a much higher yield of 10%, paying out $1 per share quarterly with a stock price of $40.04 (adjusted for a stock split in 2022).

However, a closer look at the companies’ 5-year dividend growth rates at the time could have given investors a clue as to their future dividend trajectory. In 2019, Target’s 5-year dividend growth rate was a healthy 8.28%, indicating a commitment to consistently increasing its payout. On the other hand, Annaly’s 5-year dividend growth rate was negative at -3.58%, suggesting that the company was struggling to maintain its high dividend.

Fast forward to today, and the picture looks quite different. Target has consistently grown its dividend over the past five years, with a compound annual growth rate (CAGR) of 11.51%. The company now pays $1.10 per share quarterly, and the stock price has appreciated to $163.36. For investors who bought Target five years ago, their yield on cost (the current annual dividend rate divided by the original purchase price) has increased to an impressive 5.68%.

On the other hand, Annaly Capital Management has struggled to maintain its high dividend. In fact, the company has had a negative dividend growth rate over the past five years, with a CAGR of -11.54%. Today, Annaly pays $0.65 per share quarterly, and the stock price has fallen to $19.08. Investors who bought Annaly five years ago have seen their yield on cost drop to 6.5%, which, while still solid, is likely disappointing for those who were drawn to the initial 10% dividend. Moreover, the 53% decline in share price over the same period has further eroded total returns.

This comparison highlights the importance of considering a company’s dividend growth rate, not just its current yield, when making investment decisions. A history of consistent dividend growth can be a strong indicator of a company’s financial health and ability to continue increasing its payout.

Looking Ahead: VICI Properties

VICI Properties Inc.(NYSE:VICI) is worth considering for investors seeking a company with strong dividend growth potential. This real estate investment trust (REIT) specializes in owning and acquiring gaming, hospitality and entertainment destinations. Over the past five years, VICI has demonstrated a healthy dividend growth rate, with a CAGR of 7.76%.

Five years ago, VICI offered a 5% yield, paying $0.2875 per share quarterly with a stock price of $22.80. Today, the company has increased its quarterly dividend to $0.4150 per share, and the stock price has appreciated to $28.98. Investors who bought VICI five years ago now enjoy a yield on cost of 7.28%, showcasing the power of dividend growth.

Check out: Passive income investments are one of the most trusted methods for riding out a recession, so it's no surprise that people are turning to these high-yield real estate notes that pay a fixed 7.5% – 9%.

Alternative Yield-Generating Options

For investors looking to diversify their income streams beyond traditional dividend stocks, alternative investment platforms like Arrived and Cityfunds offer compelling opportunities.

Arrived is a real estate investment platform that allows individuals to invest in fractional shares of rental properties for as little as $100. With an average dividend yield of 4.2%, Arrived offers investors the potential for passive income and capital appreciation without the hassles of being a landlord.

Cityfunds Yield, on the other hand, is a fixed-income fund that targets an 8% annual percentage yield (APY) by investing in a diversified pool of collateralized real estate loans. The fund pays out distributions on a quarterly basis and offers a manager-guaranteed base yield of 7% to 8%, making it an attractive option for income-focused investors.

The Bottom Line

While a stock’s current dividend yield is certainly an essential factor to consider, investors should not overlook the importance of dividend growth. Companies with consistent and robust dividend growth, like Target and VICI Properties, can provide investors with a rising income stream and the potential for capital appreciation over time. By examining a company’s dividend growth history, investors can gain valuable insights into its potential for future dividend increases.

However, it’s crucial to approach any investment with a well-diversified strategy. Alternative yield-generating options like Arrived and Cityfunds Yield can help investors diversify their income streams and potentially mitigate risk.

As always, investors should thoroughly research any potential investment and consult with a financial advisor to ensure that their investment choices align with their goals and risk tolerance. By focusing on dividend growth and diversification, investors can build a resilient income-generating portfolio that stands the test of time.

This article Want More Dividend Income? Here's Why You Should Focus On Dividend Growth Over Current Yield originally appeared on Benzinga.com