Why I Use Dividend Growth Investing to Get Wealthy

Mark Seed is passionate about personal finance and investing and is the blogger behind My Own Advisor. Mark is currently investing in dividend paying stocks on his journey to financial freedom. He is almost halfway to his goal of earning $30,000 per year in tax-free and tax-efficient dividend income for an early retirement. You can follow Mark on his path to financial freedom here.

I wasn’t always a dividend growth investor. In fact, for a good part of my 20s, I wasn’t much of an investor at all. As a young Canadian kid fresh out of university having secured my first full-time (real) job at a major pharmaceutical company, I didn’t think very much about my financial future. Sure, I knew enough to “pay myself first” (and I did) to the tune of about $50 per month in my registered investment account, similar to a 401(k), but I was focused on living for today. And who isn’t for the most part in their 20s – you only live once right?

The reality check

As you get older in life, you realize more and more you don’t know what you don’t know. You also figure out when it comes to investing in particular, by owning some pricey mutual fund investments, you’re paying steep money management fees for products that have no chance to outperform the market over time. You also learn the fees paid in money management fees is money you’ll never see again. It’s a massive double-whammy that occurs in Canada, and the United States, and pretty much anywhere around the world. This is part of the reality check that led me to dividend growth investing.

13 Dividend Aristocrats for Further Research

Last week I shared with you the list of 2016 Dividend Aristocrats and its performance over the past decade. In addition, I isolated twenty-one companies for further research. In order to come up with the list, I looked for companies where:

1) P/E was below 20

For those of you who have read my stock analyses, you know that these are just the beginning criteria I use to reduce the list of investable opportunities to a more manageable level.

I also looked for:

2) Dividend Payout Ratio below 60%
3) Minimum yield of 2%

If you want to add more quantitative criteria, I would look for companies where the 5 and 10 year dividend growth rate exceeds a certain percentage such as 5% or 6%/year on average. After that, I would look at trends in earnings per share, dividends per share, and dividend payout ratios to further isolate the companies which have managed to prosper. I do this in order to eliminate companies that have managed to grow dividends not because they prospered, but because they are simply paying a higher portion of earnings out to shareholders.

Below, you could find the list of companies for further research. You may also check linked analysis for more details on each company:

How to have enough

I have shared with you early in the year, that I am essentially living off dividends and side income in 2016. I am saving my other income in tax-deferred accounts. I sleep like a baby*. I am happy with what I have achieved. However, I keep learning. I have a goal of generating a certain dollar amount from my portfolio within a certain timeframe. I also have figured out how to achieve that through regular screening, analyzing, and investing in quality dividend growth stocks.

Some people are never happy with what they have however. They never have enough. Their level of happiness is not dependent on what they have, but rather on what they don’t have. This is a slippery slope, which would put you in the rat race of its own. If you have a nice house, but your neighbor has a nicer and bigger house, you will succumb to a syndrome called ‘Keeping up with the Joneses”. If your portfolio generates enough dividends for you to live off, you should be happy. Many are not happy however, because their neighbor tells them they are doubling their money by investing in hot tech stocks. If you benchmark your success relative to the success of others, you will never be happy or accomplished. This is because there is always someone that is better than you at something else.

As an investor you need to have goals, and then create a strategy to achieve those goals.

For investors like you and me, the goal is to live off our nest eggs, and to never outlive them.

Dividend Aristocrats List for 2016

S&P 500® Dividend Aristocrats index measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.

There are 50 dividend aristocrats today, with an average yield of 2.50%. Tomorrow, I would share a list of the 21 dividend aristocrats I would consider for further research if I were just starting out today.

Dividend Aristocrats for Dividend Growth and Total Returns

Investing in dividend growth stocks has been a winning investment over the past 8 – 10 years. I myself have invested in dividend growth stocks for over eight years.

Eight years ago, I told you that I like the list of dividend aristocrats. S&P 500® Dividend Aristocrats measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. The elite group of dividend aristocrats had outperformed the S&P 500 over the preceding 18 years. The special thing about this group of stocks was their track record of annual dividend increases which exceeded a quarter of a century. It made logical sense to me that it is worth studying:

Unilever Rewards Long-Term Shareholders With Regular Dividend Raises

Unilever PLC (UL) operates in the fast-moving consumer goods market in the Africa, Americas, Asia Pacific, Europe, and Middle East. The company operates through Personal Care, Foods, Refreshment, and Home Care segments.

Unilever increased its quarterly dividend by 6% to 32.01 eurocents/share. This marked the 21st consecutive annual dividend increase for this international dividend achiever. Between 2005 and 2015, Unilever has managed to boost annual dividends from 66 eurocents/share to 1.19 Euro/share.

When evaluating foreign based companies, I focus on the dividend payment in the local currency, because this is what the board of directors has control over. I am familiar with some investors who focus on the payment in US dollars, and therefore reach incorrect conclusions about the length of dividend increases and might end up avoiding a quality company through no fault of its own.
That being said, the company has managed to increase dividends every single year since 1995. This means that this international dividend achiever has rewarded its shareholders with a dividend increase for 21 years in a row. You may want to check the dividend history going back to the early 1990s in this article.

Why I Chose Dividend Growth Investing

This is a guest post from Roadmap2Retire blog, which documents the retirement journey of a dividend growth investor from Canada.

I am an advocate of dividend growth investing – an investment model where I own part of a strong company instead of renting a stock for a relatively short amount of time. I believe shareholders should compensated by companies sharing their profits, while investors stay invested instead of selling and exiting an investment to realize any profit. In addition, I want my investment dollars working harder and providing me increased profits year after year. This basic principle has led me to the path down dividend growth investing and find it a sustainable reliable investing model – whether in accumulation phase or retirement phase.

Early Investing years

As with most investors starting out, I made my mistakes by chasing growth companies – paying no attention to valuation. My first investments were via expensive mutual funds – where I paid an exorbitant fee for the privilege of investing. Little did I know that those 2 - 4% management fees were going to impose a hefty drag on my performance. But as I got more familiar with the investing world, and got more educated over the years, I started dabbling in individual stocks. This was right around the time when the financial crisis hit the US (and world) markets circa 2008. What did I end up with my first investments? Banks & Financial companies! While the correction was ongoing, I kept buying companies such as Washington Mutual, Wachovia, Merrill Lynch, etc. As most investors are aware, these institutions do not exist anymore or exist as a faded memory within a different organization. I shared a post documenting these mistakes here.

Why relative performance comparisons provide no value to me

As a dividend growth investor, my goal is to generate a certain amount of money that would pay for my expenses in retirement. I work to achieve this goal by creating a portfolio of companies that include certain characteristics such as a track record of dividend growth exceeding a decade, good valuation, decent growth prospects, strong brands and strong competitive advantages etc. I evaluate my progress by comparing the amount of dividend income that covers my expenses. Right now, my dividend income is expected to cover 83% of expenses on the low end of annual expenses and 63% at the high end of my expenses. However, I do not track my total returns, which irritates many out there. But I couldn't care less.

I believe that tracking my total return is a waste of time. This is because based on the studies I have read, and the data I have seen, a diversified portfolio of stocks will likely get a similar total return to what the so called market would get. Plus, if I “underperform” some benchmark over a short period of time, I would feel the pressure “to do something”, which goes against the tenet of reducing portfolio turnover. And believe me, the pressure to switch to some other strategy will be highest after a stock has gone nowhere for a while, causing you and everyone else to doubt your abilities.

Procter & Gamble Raises Dividends for 60th Year in a row

The Procter & Gamble Company (PG), together with its subsidiaries, manufactures and sells branded consumer packaged products worldwide. It operates through five segments: Beauty, Hair and Personal Care; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care.

The company raised its quarterly dividends to 66.95 cents/share. This marked the 60th consecutive annual dividend increase for this dividend king. There are only 18 dividend kings, which have raised dividends for more than 50 years in a row.

Unfortunately, the problem with Procter & Gamble’s dividend increase was that it was only 1%. This was the slowest dividend increase I could find going back 46 years. It shows that things are not going as well as expected. The company is in the middle of a turnaround, and it is trying to streamline its operations and focus on a smaller number of brands. A lot of operations are set to be sold off.
Throughout my experience as a dividend investor, I have learned that management usually bases their new dividend rates based on their business outlook. In the case of Procter & Gamble, it would seem that management sees the near term business outlook as grim. Since I hold a diversified dividend portfolio, the effect of P&G's slow dividend growth will be offset by other companies that grow dividends faster.

Four Lessons Learned from 20 Years of DRIP Investing

This is a guest post written by Retire Before Dad. He writes about dividend investing, personal finance and travel at the Retire Before Dad blog.

I’ve been an active DRIP (dividend reinvestment plan) investor since receiving my first share of Chevron (CVX) as a gift while still in college in the 90’s. DRIP investing is an easy way for individuals to get started buying stock in one company at a time. DRIPs allow investors to invest directly in a company instead of through a traditional or online broker.

Investors who want to dollar cost average into a stock and reinvest the dividends, like DRIPs for their simplicity. Companies sometimes offer discounted prices to employees through DRIPs to help build loyalty.

DRIPs are administered through Transfer Agents. These are companies such as Computershare and Wells Fargo Shareowner Services. They execute batch trades to buy and sell stock for investors, then maintain the investor’s holdings, cost basis, and dividend tax documents. Most DRIPs can be found by looking at a company’s Investor Relations page.

As a long time DRIP investor, I’ve started to move away from DRIPs because they are no longer the best way for me to accomplish my goals. For all their advantages, DRIPs have some inherent downsides.

How many individual stocks do I need to consider myself diversified?

As an investor, I have always believed in diversification. I would rather err on the side of caution, rather than swing for the fences. It makes no sense to take excessive risks on a concentrated portfolio of stocks, particularly once you are financially independent or very close to it. In my case, diversification means not only owning a lot of individual dividend paying stocks, but also holding some fixed income such as government bonds and certificates of deposit that are insured.

As I have been talking about my plan, I often hear someone who tells me that I am not diversified. This statement is surprising, because my dividend portfolio includes something like 100 individual names. The 60 largest components account for most of the portfolio however. Someone always comes and tells me that I need to own thousands of individual stocks, in order to consider myself diversified. I disagree with that statement. I do not really have to look far, in order to refute this statement with actual data.

For example, I looked at the total performance of three stock market indexes over the past few decades from Morningstar.