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package/.claude/skills/dividend-growth-pullback-screener/references/dividend_growth_compounding.md

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+# The Power of Dividend Growth Compounding
+
+## Core Concept: Yield on Cost vs. Current Yield
+
+**Current Yield:** What a stock yields today based on today's price
+**Yield on Cost (YOC):** What a stock yields based on YOUR purchase price
+
+**Example:**
+```
+Stock A purchased 10 years ago:
+- Purchase price: $50
+- Annual dividend at purchase: $1.00
+- Initial yield on cost: 2.0%
+
+Stock A today:
+- Current price: $120
+- Annual dividend today: $2.50
+- Current yield: 2.1% (for new buyers)
+- YOUR yield on cost: 5.0% (based on your $50 cost)
+```
+
+**Key Insight:** Your yield on cost grows every time the dividend increases, regardless of stock price movement. This is the magic of dividend growth investing.
+
+## The Mathematics of Dividend Growth
+
+### 12% Annual Dividend Growth (Screening Minimum)
+
+Starting with 1.5% yield:
+
+| Year | Annual Dividend | Yield on Cost | Cumulative Dividends | Total Value |
+|------|----------------|---------------|---------------------|-------------|
+| 0 | $1.50 | 1.50% | $0 | $100 |
+| 1 | $1.68 | 1.68% | $1.68 | $101.68 |
+| 3 | $2.11 | 2.11% | $5.51 | $105.51 |
+| 5 | $2.64 | 2.64% | $10.18 | $110.18 |
+| 10 | $4.66 | 4.66% | $26.20 | $126.20 |
+| 15 | $8.22 | 8.22% | $53.98 | $153.98 |
+| 20 | $14.50 | 14.50% | $102.45 | $202.45 |
+
+**Key Milestones:**
+- Year 6: Dividend doubles (3% yield on cost)
+- Year 12: Dividend quadruples (6% yield on cost)
+- Year 18: Dividend grows 8x (12% yield on cost)
+
+### 15% Annual Dividend Growth (Excellent Tier)
+
+Starting with 1.8% yield:
+
+| Year | Annual Dividend | Yield on Cost | Cumulative Dividends | Total Value |
+|------|----------------|---------------|---------------------|-------------|
+| 0 | $1.80 | 1.80% | $0 | $100 |
+| 1 | $2.07 | 2.07% | $2.07 | $102.07 |
+| 3 | $2.74 | 2.74% | $7.02 | $107.02 |
+| 5 | $3.62 | 3.62% | $13.86 | $113.86 |
+| 10 | $7.28 | 7.28% | $40.57 | $140.57 |
+| 15 | $14.65 | 14.65% | $93.11 | $193.11 |
+| 20 | $29.47 | 29.47% | $195.57 | $295.57 |
+
+**Key Milestones:**
+- Year 5: Dividend doubles (3.6% yield on cost)
+- Year 10: Dividend quadruples (7.3% yield on cost)
+- Year 15: Dividend grows 8x (14.7% yield on cost)
+- Year 20: Dividend grows 16x (29.5% yield on cost)
+
+### 20% Annual Dividend Growth (Exceptional Tier)
+
+Starting with 2.0% yield:
+
+| Year | Annual Dividend | Yield on Cost | Cumulative Dividends | Total Value |
+|------|----------------|---------------|---------------------|-------------|
+| 0 | $2.00 | 2.00% | $0 | $100 |
+| 1 | $2.40 | 2.40% | $2.40 | $102.40 |
+| 3 | $3.46 | 3.46% | $8.66 | $108.66 |
+| 5 | $4.98 | 4.98% | $18.67 | $118.67 |
+| 10 | $12.38 | 12.38% | $63.10 | $163.10 |
+| 15 | $30.77 | 30.77% | $181.74 | $281.74 |
+| 20 | $76.49 | 76.49% | $479.76 | $579.76 |
+
+**Key Milestones:**
+- Year 4: Dividend doubles (4% yield on cost)
+- Year 8: Dividend quadruples (8.6% yield on cost)
+- Year 12: Dividend grows 8x (17.8% yield on cost)
+- Year 16: Dividend grows 16x (36.6% yield on cost)
+
+## Growth vs. Yield Trade-Off
+
+### Scenario Comparison: 20-Year Investment
+
+**Stock A: High Yield, Low Growth**
+- Initial Yield: 4.0%
+- Dividend Growth: 3% annually
+- Year 20 Yield on Cost: 7.2%
+- Total Dividends Collected: $109.11
+- Final Position Value (with dividends): $209.11
+
+**Stock B: Low Yield, High Growth**
+- Initial Yield: 1.5%
+- Dividend Growth: 15% annually
+- Year 20 Yield on Cost: 24.5%
+- Total Dividends Collected: $146.79
+- Final Position Value (with dividends): $246.79
+
+**Winner: Stock B by 18% higher total return**
+
+**Key Insight:** Lower starting yield + higher growth beats higher starting yield + lower growth over long periods (10+ years). This is why we screen for 12%+ dividend growth, not maximum current yield.
+
+## Real-World Examples
+
+### Microsoft (MSFT): 2010-2020
+
+**2010 Entry:**
+- Price: $28
+- Annual Dividend: $0.55
+- Yield on Cost: 2.0%
+- Dividend Growth Rate: ~15% annually
+
+**2020 Result:**
+- Price: $220 (7.9x)
+- Annual Dividend: $2.24
+- Yield on Cost: 8.0% (4x)
+- Total Return: ~900% including dividends
+
+**Lesson:** A "boring" 2% yielder in 2010 became an 8% yielder on cost in 10 years. Investors who bought for the 2% yield stayed for the dividend growth and compounded massive returns.
+
+### Visa (V): 2012-2022
+
+**2012 Entry (Post-IPO):**
+- Price: $20 (split-adjusted)
+- Annual Dividend: $0.10
+- Yield on Cost: 0.5%
+- Dividend Growth Rate: ~20% annually
+
+**2022 Result:**
+- Price: $210 (10.5x)
+- Annual Dividend: $1.50
+- Yield on Cost: 7.5% (15x)
+- Total Return: ~1,100% including dividends
+
+**Lesson:** Even a 0.5% yielder can become a high-yield position through sustained dividend growth. The starting yield is less important than the growth rate.
+
+### Apple (AAPL): 2012-2022 (After Dividend Reinstatement)
+
+**2012 Entry:**
+- Price: $19 (split-adjusted)
+- Annual Dividend: $0.38 (split-adjusted)
+- Yield on Cost: 2.0%
+- Dividend Growth Rate: ~10% annually
+
+**2022 Result:**
+- Price: $150 (7.9x)
+- Annual Dividend: $0.92 (split-adjusted)
+- Yield on Cost: 4.8% (2.4x)
+- Total Return: ~850% including dividends
+
+**Lesson:** Even "modest" 10% dividend growth creates significant income growth over a decade, especially when combined with price appreciation.
+
+## Quality Characteristics of Dividend Growth Stocks
+
+### Why Do Companies Grow Dividends 12%+?
+
+**Business Growth:**
+- Revenue growing 10%+ annually
+- Earnings per share (EPS) growing 12%+ annually
+- Market share expansion or pricing power
+
+**Capital Efficiency:**
+- High Return on Equity (ROE >15%)
+- Strong profit margins (>15%)
+- Excess cash generation
+
+**Capital Allocation Priority:**
+- Management committed to dividend growth
+- Payout ratios low enough to sustain growth (30-70%)
+- Balance between dividends, buybacks, and reinvestment
+
+**Competitive Advantages:**
+- Economic moats (brand, network effects, switching costs)
+- Pricing power to pass through inflation
+- Secular growth tailwinds
+
+### Typical Profiles
+
+**Technology (Software/Payments):**
+- Example: Microsoft, Visa, Mastercard
+- Characteristics: High margins (30-50%), low capex, scalable
+- Dividend Growth: 15-20% annually
+- Starting Yield: 0.5-1.5%
+- Payout Ratio: 20-40%
+
+**Financials (Banks/Insurers):**
+- Example: JPMorgan, Progressive
+- Characteristics: ROE 12-18%, regulatory capital requirements
+- Dividend Growth: 10-15% annually
+- Starting Yield: 2-3%
+- Payout Ratio: 30-50%
+
+**Consumer (Brands/Retail):**
+- Example: Nike, Costco, Starbucks
+- Characteristics: Brand loyalty, pricing power
+- Dividend Growth: 12-18% annually
+- Starting Yield: 1-2.5%
+- Payout Ratio: 30-50%
+
+**Healthcare (Pharma/Devices):**
+- Example: Abbott, Johnson & Johnson
+- Characteristics: Patent protection, aging demographics
+- Dividend Growth: 8-15% annually
+- Starting Yield: 1.5-2.5%
+- Payout Ratio: 40-60%
+
+## Sustainability: Can 12%+ Growth Continue?
+
+### Payout Ratio Dynamics
+
+**Low Payout Ratios (20-50%) = Sustainable Growth:**
+
+If a company pays out only 40% of earnings as dividends:
+- EPS needs to grow 12% → Dividend can grow 12% (payout ratio stable)
+- EPS grows 8% → Dividend can still grow 12% by increasing payout ratio
+- Creates multi-year runway for high dividend growth
+
+**Example: Microsoft 2010-2020**
+```
+2010: EPS $2.50, Dividend $0.55, Payout Ratio 22%
+2020: EPS $6.20, Dividend $2.24, Payout Ratio 36%
+
+EPS CAGR: 9.5%
+Dividend CAGR: 15.0%
+Payout ratio expanded from 22% → 36%, enabling higher dividend growth
+```
+
+**High Payout Ratios (70-90%) = Unsustainable:**
+
+If a company pays out 80% of earnings:
+- EPS must grow 12%+ to sustain 12% dividend growth
+- No room for payout ratio expansion
+- Risk of dividend cut if earnings decline
+
+### The Growth Ceiling
+
+**Mathematical Reality:**
+- A 1.5% yielding stock growing dividends 15%/year will eventually yield 10%+ on cost
+- At that point, payout ratios force dividend growth to slow
+- Typical ceiling: After 10-15 years, dividend growth slows to 5-10%
+
+**Why This Is OK:**
+```
+Years 1-10: Dividend growth 15%, total return 18-20%/year
+Years 11-20: Dividend growth 8%, total return 10-12%/year
+Years 21+: Dividend growth 5%, total return 7-9%/year
+
+Your yield on cost is now 15-20%, generating massive income
+```
+
+**Lesson:** High dividend growth cannot last forever, but it doesn't need to. The compounding in the first 10-15 years creates permanently elevated income streams.
+
+## Portfolio Construction with Dividend Growth
+
+### Diversification Across Growth Tiers
+
+**Balanced Approach (Recommended):**
+- 40% in 12-15% growers (sustainable, moderate risk)
+- 40% in 15-20% growers (excellent growth, higher valuation risk)
+- 20% in 20%+ growers (exceptional but may slow down)
+
+**Rationale:**
+- 12-15% growers provide stable compounding
+- 15-20% growers drive outsized returns
+- 20%+ growers add "lottery ticket" upside
+
+**Result:** Portfolio-level dividend growth ~15%/year, balancing risk and reward
+
+### Entry Timing with RSI
+
+**Without RSI Timing:**
+- Buy 2% yielder at fair value
+- Year 10 yield on cost: 8.0% (15% CAGR)
+
+**With RSI ≤35 Timing:**
+- Buy same stock 12% cheaper during pullback
+- Effective yield: 2.27% (vs 2.0%)
+- Year 10 yield on cost: 9.1% (13.7% improvement)
+- Plus: Better total return from lower entry price
+
+**Lesson:** RSI timing enhances already strong dividend growth returns. Even modest entry price improvements (10-15%) compound significantly over time.
+
+### Reinvestment vs. Income
+
+**Reinvestment (Accumulation Phase):**
+- Reinvest all dividends into more shares
+- Accelerates compounding through DRIP
+- Effective dividend growth rate includes share accumulation
+- Example: 15% dividend growth + 2% yield reinvested ≈ 17% total dividend income growth
+
+**Income (Distribution Phase):**
+- Spend dividends as income
+- Rely on dividend growth for inflation protection
+- 12% dividend growth = doubling income every 6 years
+
+## Common Misconceptions
+
+### "I Need High Yield NOW for Income"
+
+**Reality:** If your time horizon is 10+ years, starting yield matters far less than growth rate.
+
+**Math:**
+```
+Stock A: 5% yield, 3% growth
+Year 10 income: 5% × 1.03^10 = 6.7% on cost
+
+Stock B: 1.5% yield, 15% growth
+Year 10 income: 1.5% × 1.15^10 = 6.1% on cost
+
+Year 15 income:
+Stock A: 7.8% on cost
+Stock B: 12.1% on cost (55% more income!)
+```
+
+**Takeaway:** Patience with dividend growth beats immediate high yield.
+
+### "Low Payout Ratio Means Company Is Cheap"
+
+**Reality:** Low payout ratios (20-40%) in dividend growers are GOOD, not a sign of stinginess.
+
+**Why:**
+- Provides runway for sustained 12-15% dividend growth
+- Signals management confidence (room to increase)
+- Enables dividend growth even if earnings slow slightly
+
+**Contrast:** High payout ratios (80-100%) limit dividend growth and signal risk.
+
+### "Dividend Growth Will Slow When Stock Gets Expensive"
+
+**Partial Truth:** Valuation and dividend growth are separate.
+
+**Reality:**
+- Expensive stocks (high P/E) CAN sustain high dividend growth if earnings grow
+- Cheap stocks (low P/E) can have slow dividend growth if business is mature
+
+**Focus:** Business growth (revenue, EPS) drives dividend growth, not valuation multiples. However, expensive stocks have lower total returns if multiples compress, even if dividends grow.
+
+## Practical Application
+
+### Stock Selection Checklist
+
+For screening, require:
+- [ ] Current Yield ≥ 1.5% (provides income floor)
+- [ ] 3-Year Dividend CAGR ≥ 12% (proven growth)
+- [ ] Payout Ratio < 80% (sustainable)
+- [ ] Revenue CAGR > 0% (business growing)
+- [ ] EPS CAGR > 0% (profitability growing)
+- [ ] RSI ≤ 40 (timing opportunity)
+
+### Position Monitoring
+
+**Quarterly Reviews:**
+- [ ] Dividend increased in past 12 months?
+- [ ] Dividend growth rate still ≥10%? (Allow slight slowdown)
+- [ ] Payout ratio stable or declining?
+- [ ] Revenue and EPS growing?
+
+**Action:** If all checks pass, hold indefinitely. If 2+ fail, consider trimming.
+
+### Exit Triggers
+
+**Fundamental Deterioration:**
+- Dividend growth slows below 5%/year for 2+ years
+- Payout ratio approaches 100%
+- Revenue or EPS declining for 2+ quarters
+- Management signals dividend growth pause
+
+**Do NOT Exit For:**
+- Stock price volatility (ignore noise)
+- Valuation expansion (P/E rising)
+- RSI overbought (>70)
+- Market corrections
+
+**Lesson:** You're holding for dividend growth, not price appreciation. Price volatility is irrelevant if dividends keep growing.
+
+## Conclusion
+
+Dividend growth investing is about patience and compounding. The strategy is:
+
+1. **Find Quality:** Screen for 12%+ dividend CAGR, 1.5%+ yield
+2. **Time Entry:** Use RSI ≤40 to buy during temporary weakness
+3. **Hold Forever:** Let dividends compound for 10-20 years
+4. **Reinvest (Optional):** Accelerate compounding in accumulation phase
+5. **Enjoy Income:** Eventually yield on cost becomes 10-20%+, providing massive income
+
+The magic is NOT in picking individual winners - it's in systematically buying quality dividend growers at good entry prices (RSI ≤40) and holding long enough for compounding to work.
+
+**Remember:**
+- A 1.5% yielder growing 15%/year becomes a 6% yielder in 10 years and 24% yielder in 20 years
+- Entry price matters - RSI ≤40 improves cost basis by 10-15% typically
+- Time horizon is critical - Need 10+ years for full compounding effect
+- Business quality trumps everything - 12%+ dividend growth requires strong fundamentals
+
+---
+
+**Disclaimer:** Past dividend growth does not guarantee future performance. Dividend policies can change. Conduct thorough due diligence and consult a financial advisor before making investment decisions.