How dividend growth can help to unearth resilient growth stocks

When it comes to investment strategies, ‘growth’ and ‘income’ investors tend to focus on very different things. For growth investors, it’s often the case that sales and earnings are more important than dividend payouts. But it’s worth remembering that dividend track records can tell you a lot about a company’s growth and outlook - and not just how much cash is finding its way back into shareholder pockets.

Jim Slater, the famous British growth investor, wrote in his 1992 book The Zulu Principle, that he preferred companies that pay a dividend. Slater was a dyed-in-the-wool growth investor, but here he was stating the case for dividends. He explained: “...the dividend payment and forecast (if any) to some extent corroborate the management's confidence in the future. The ideal company will have a steadily increasing dividend growing broadly in line with earnings.”

What he was saying was that the dividend was a useful extra way of figuring out whether a company’s growth was likely to continue. Yet some growth investing strategies actually see dividends as a negative.

Indeed, a traditional view of companies that pay cash back to investors is that they’ve simply run out of ideas. They don’t know how to grow any...