The tools that there investors can leverage in order to reach their financial independence goals include time, compounding, capital and smart investing.
One investment strategy that can provide for your own investing is investing in dividend paying stocks. By creating a portfolio that consists of dividend paying stocks, an investor generates income that is paid to them at predictable intervals of time. Having a stream of income deposited in your brokerage account every month or every quarter makes budgeting much easier, and living off dividends a no brainer solution.
I view every dollar I can save as a dollar that can generate income for life. Let’s assume that this dollar is invested in a dividend stock that yields 4%, grows distributions and stock price by 6% annually. After ten years, this dollar will generate 7.16 cents in income, which will increase to 12.80 cents by year 20. In 30 years, this dollar will be generating almost 23 cents in annual income. If distributions are reinvested however, the dollar will be generating 10 cents, 26.70 cents and 71 cents in the next 10, 20 and 30 year periods. One cannot retire on a single dollar alone, but if you keep adding dollars to your investment portfolio and let them compound through dividend reinvestment, our investor can afford to generate enough income to retire.
These dollars need to be invested by designing and creating a diversified dividend portfolio that consists of at least 30 individual stocks. The portfolio should have representation from as many industries that make sense at the time of implementation. This portfolio should focus on dividend growth stocks, which are companies that have a history of regular dividend increases. A company that regularly increases dividends essentially provides investors with a stream of income that keeps its purchasing power over time. Compared to interest income, dividend income looks like a clear winner for preserving purchasing power from inflation.
The element of time is another crucial element in achieving financial independence with dividend paying stocks. Depending on the amount of capital invested initially, as well as the amount of capital added each month, a portfolio would require differing amounts of time to compound before a sustainable amount of income is generated. The portfolio would need more time to compound investment dollars in order to reach the target monthly dividend income if the amount of capital added is not high enough. However, if the amount of capital added to it is large enough, the time needed to reach the monthly income targets would be greatly reduced.
For example, let’s assume that an investor puts $1000/month in the stocks yielding 4% today and achieving a 6% annual dividend growth. If dividends are reinvested, the portfolio will generate over $7,900 in annual dividend income in ten years. However, if our investor put away $2000/month in income stocks with the same characteristics as above, they would be achieving $7,900 in annual dividend income only after 72 months.
Besides diversification and power of compounding, another crucially important factor to building a successful dividend portfolio is stock valuation. Just like a house is composed of many bricks, placed one by one, a portfolio is comprised of many individual stocks which are the building blocks that provide support behind the portfolio. If one or a few companies in a concentrated sector bet crumbles during a recession, it could potentially destroy the whole structure. Having a strong foundation would protect investors’ income portfolios in the event of dividend cuts or eliminations as a result of unfavorable business conditions. Each dividend stock in a portfolio should thus have to be carefully chosen, and should be purchased only at attractive valuations. Purchasing shares when they are cheap maximizes price gains and dividend income for shareholders over time. This further turbocharges the compounding in income stream growth over time. I typically look for companies that have raised dividends for over 10 years, that trade at less than 20 times earnings, have a dividend payout ratio of less than 60% and which yield at least 2.50%. For Master Limited Partnerships and Real Estate Investment Trusts however, the only differences related to how I calculate payout ratios and what minimum yield requirements I selected.
A few companies which are attractively valued today include:
|
SYMBOL
|
P/E
|
DPR
|
10 yr DG
|
YIELD
|
PRICE
|
DIV/SHARE
|
EPS
|
|
|
ADM
|
19.69
|
48%
|
12%
|
2.10%
|
49.04
|
0.96
|
2.01
|
|
|
AFL
|
9.35
|
23%
|
17%
|
2.30%
|
59.19
|
1.48
|
6.46
|
|
|
BMS
|
18.19
|
53%
|
6%
|
2.60%
|
39.84
|
1.08
|
2.05
|
|
|
CB
|
10.8
|
24%
|
9%
|
2.10%
|
88.34
|
2
|
8.36
|
|
|
CVX
|
12.21
|
42%
|
11%
|
3.20%
|
127.86
|
4.28
|
10.27
|
|
|
EFSI
|
11.76
|
37%
|
7%
|
3.60%
|
22.95
|
0.72
|
1.97
|
|
|
GPC
|
19.19
|
51%
|
6%
|
2.60%
|
84.24
|
2.3
|
4.49
|
|
|
HP
|
16.17
|
39%
|
23%
|
2.40%
|
103.23
|
2.75
|
7.09
|
|
|
JNJ
|
18.69
|
54%
|
11%
|
2.70%
|
101.08
|
2.8
|
5.23
|
|
|
MCD
|
16.94
|
59%
|
23%
|
3.20%
|
93.55
|
3.24
|
5.5
|
|
|
MMM
|
19.85
|
50%
|
7%
|
2.40%
|
140.85
|
3.42
|
6.9
|
|
|
ORI
|
8.98
|
36%
|
7%
|
4.30%
|
14.39
|
0.73
|
2.04
|
|
|
SRCE
|
12.68
|
32%
|
7%
|
2.30%
|
29.25
|
0.72
|
2.28
|
|
|
TMP
|
12.23
|
46%
|
6%
|
3.30%
|
44.36
|
1.6
|
3.51
|
|
|
TROW
|
18.08
|
43%
|
16%
|
2.10%
|
78.11
|
1.76
|
4.11
|
|
|
UGI
|
16.67
|
41%
|
7%
|
2.40%
|
49.02
|
1.18
|
2.85
|
|
|
WEYS
|
16.75
|
47%
|
15%
|
2.80%
|
27.08
|
0.76
|
1.61
|
|
|
WMT
|
15.42
|
40%
|
18%
|
2.50%
|
74.67
|
1.92
|
4.84
|
|
|
XOM
|
12.72
|
38%
|
10%
|
2.70%
|
99.74
|
2.76
|
7.34
|
Full Disclosure: Long ADM, AFL, CB, CVX, JNJ, MCD, MMM, WMT, XOM
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