Inflation quietly diminishes the value of money over time and forces us to change how we invest.
For fellow income investors, our real income steadily shrinks if the dividend payout remains stagnant, even if the yield is high today.
Rather than simply chasing the highest current yield, investors would do well to seek out companies that consistently increase their dividends to help preserve purchasing power.
In an inflationary environment, the lack of dividend growth spells trouble.
The Problem: Static Income vs Rising Costs
Inflation affects every area of our lives, from rising food prices to escalating healthcare costs.
The core problem is how static income loses value.
On paper, you receive the same payout, but its purchasing power diminishes.
S$1000 worth of goods and services in the Food, Education, and Healthcare categories in 2025 used to cost approximately S$780, S$815, and S$824 respectively ten years ago.
When payouts do not keep pace with inflation, the real value of your income wanes.
What Dividend Growth Really Means
Dividend growth measures a company’s ability to increase its payout, creating a rising income stream that can outpace inflation.
This is typically achieved when a business grows earnings, generates strong cash flows and maintains pricing power.
A rising dividend signals management’s confidence in future earnings and sound capital allocation.
For individual investors, dividend growth brings peace of mind.
Why Dividend Growth Beats High Yield Over Time
Compounding Effect
Growing dividends accelerate income growth since each increment builds on the last.
When reinvested, these dividends buy more shares that generate their own payouts, creating a cycle of compounding growth.
Your portfolio income will grow exponentially, converting steady dividend growth into significant long-term wealth creation.
Inflation Protection
Inflation makes fixed income streams less effective.
Higher payouts allow investors to stay ahead of rising costs, providing a hedge for retirees and income-oriented portfolios.
Better Business Quality
Companies that grow dividends consistently often have stronger fundamentals than those simply offering high headline yields.
Regular increases translate to reliable earnings, reasonable debt levels, durable competitive advantages, and healthy free cash flow.
Supermarket chain Sheng Siong (SGX: OV8) demonstrated this with its dividend growth from S$0.035 per share in FY2015 to S$0.07 per share in FY2025.
Its free cash flow sits at a healthy S$215.75 million for FY2025, up 7.4% year on year (YoY).
For investors, dividend growth can also serve as a useful indicator of business quality, offering potential for capital appreciation, not just income potential.
The Risks of Chasing High Yield
A double-digit yield can be attractive, but it often signals stress rather than strength.
For example, Lippo Malls Indonesia Retail Trust (SGX: D5IU), or LMIRT, saw its yield soar from 10% to 36% between February 2020 and January 2021 because its unit price fell from S$0.23 to S$0.06.
The payout fell to S$0.0004 per unit (2.35% yield), and distributions have been suspended since 2023.
Investors chasing short-term yield may sacrifice total returns – the combination of growing payouts and share price appreciation.
How to Build a Dividend Growth Portfolio
Rather than headline yield, focus on dividend growth and the underlying business fundamentals.
Singapore’s biggest bank, DBS Group (SGX: D05), has seen its dividend grow from FY2015’s S$0.54 to FY2025’s S$3.06 per share.
For 1Q2026, the net profit attributable to shareholders climbed 1% YoY to S$2.93 billion while maintaining a healthy return on equity (ROE) of 17.0%.
Companies with unique competitive edges or pricing power can also serve as strong anchors.
As Singapore’s sole stock exchange, Singapore Exchange (SGX: S68) has paid dividends reliably since 2001.
It currently offers a 2.1% yield, and its share price has increased 1,460% since its listing.
Reinvesting these dividends instead of spending them as cash allows investors to accelerate compounding without requiring extra capital.
Common Mistakes Investors Make
Prioritising yield over growth is a common but costly mistake, as high current payout can mask weak future earnings power.
Another frequent mistake is ignoring inflation when planning income needs.
An unchanging dividend may appear reliable, but its purchasing power declines as costs rise.
Investors also sometimes hold companies with stagnant or declining dividends for too long, hoping the yield alone justifies the position.
In doing so, they may overlook total return which is a more complete measure of long-term investment success.
Get Smart: Real Income Declines If Dividends Don’t Grow
When dealing with inflation, income that doesn’t grow is income that shrinks.
Dividend growth helps preserve purchasing power and build long-term, reliable wealth.
The smartest investors ensure their portfolio comprises stocks that not just pay, but consistently pay more over time to outpace the rising cost of living.
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Disclosure: Wenting A. does not own shares of any companies mentioned.
