Best Investing Articles For 2017

I wanted to thank you all for reading the Dividend Growth Investor website. This site is a result of my efforts to improve my investing over time, write down and organize my thoughts, and make myself do the work to form an opinion on companies to invest in.

I find it helpful to write down my position on a given topic, and then revisit it a few years later, in order to learn from it. I would encourage all of you to keep an investment journal in private or in public, in order to write down reasons behind your strategy and the investment selections you are making. After a few years, you should be able to learn from your mistakes, and hopefully find ways to improve your results.

The way to improve is by gathering data, and analyzing the results against your expectations. I followed this approach to find out the most read articles on the Dividend Growth Investor website.

I have compiled a list of ten articles that readers found helpful in 2017, as evidenced by number of visits. The articles include:

My Bet With Warren Buffett

A decade ago, Warren Buffett made a famous bet with hedge fund manager Ted Seides. Buffett believed that hedge funds cannot beat the S&P 500 due to their high fees. Both parties put enough money in treasury bonds at the end of 2007, which was supposed to be worth $1 million by the end of 2017.

Buffett’s pick of S&P 500 did better than the portfolio of hedge funds selected by Ted Seides. This bet has been widely publicized by many investors. Those who believe in indexing use it as a reason to reinforce their beliefs. After all, the S&P 500 did much better than the hedge funds.

Unfortunately, the reason why the hedge fund bet did worse than S&P 500 over the past decade comes down to the fact that it had high costs and because it was globally diversified.

It makes sense that a hedge fund that charges high fees has a high hurdle rate relatively to a low cost portfolio of stocks. For example, hedge funds charge investors a 2% annual fee. In addition, they also charge investors a performance fee based on assets under management. The fee is for roughly for 20% of gains on investment. This is a rather steep set of fees, given the fact that the investors are the ones coming up with the capital at risk in the first place.

The other fact is that those hedge funds focused on US Equities, Foreign Equities and other asset classes. This is why the comparison to S&P 500 is not really an apples to apples comparison. However, even if we compare the performance to an equally weighted portfolio of US stocks, Foreign Stocks and Bonds, the hedge funds did not deliver either due to fees. However, the margin of error was lower.

I believe that the reason why the bet didn’t do as well was due to high fees, and the fact that we are not comparing apples to apples. As a DIY investor, I do not understand the need to have someone else look after your money. Wall Street makes its money by making investing complicated, so that they can charge you fees forever.

The truth is, building your own portfolio isn't really that difficult. I will illustrate this concept with this article.

Attractively Valued Dividend Kings

I shared with you the 2018 Dividend Kings List the other day. To be considered a dividend king, a company must have rewarded shareholders with an annual dividend increase for at least 50 years in a row. This is such a difficult task, that only 26 companies in the US have managed to achieve this regal status in the dividend investing world.

I received a few questions from readers, asking me which one I thought were worthy of further research. In order to answer this question, I went through my basic screen:

1) P/E ratio below 20
2) Dividend Payout Ratio below 60%
3) Having more than a nominal dividend growth
4) Rising earnings per share over the past decade
5) Since those companies have each raised dividends for 50 years in a row, they already meet my ten year minimum requirement for annual dividend increases

After applying those criterion over the list of dividend kings for 2018, I came up with the following companies for further research:

2018 Dividend Kings List

A dividend king is a company, which has managed to grow annual dividends for at least 50 years in a row. There are only 26 such companies in the US, and perhaps a couple more in the rest of the world. It is not a small achievement to have been able to reward long-term shareholders with a dividend raise for over half a century.

Over the past 50 years, some calamities experienced include:

- The Vietnam War
- The oil crisis in the 1970s
- Stagflationary 1970s
- Double digit interest rates in the 1980s
- Fall of the Soviet Union in 1991
- 9/11 in 2001
- The Dot-com bubble bursting in 2000
- The housing bubble bursting in 2007 - 2008
- ZIRP and NIRP since 2009
- Seven Recessions since 1967…

Throughout this calamity each of those businesses managed to grow earnings, and raise the dividend to their long-term shareholders. If you are looking for a long-term shareholder base, the best way to build it is by paying those owners more every single year. This is a simple, but novel idea for corporations to embrace.

Nine Dividend Stocks Rewarding Shareholders With A Raise

As part of my monitoring process, I review the list of dividend increases every week. I try to narrow down this list to a more manageable level, by focusing only on companies which have managed to boost their distributions for at least a decade (with one exception listed below). I also tried to provide a brief summary on each company, citing reasons why I like or dislike at the moment. Regular readers will not be surprised that just because a company has managed to raise dividends for a decade, that doesn’t mean that it is an automatic buy. I try to review the trends in earnings, as well as valuations and dividend sustainability, in order to come up with a quick decision whether a company is worth investigating further for a potential addition to the portfolio. In general, I am looking for a company that grows earnings, grows dividends, has an adequate margin of safety in dividends, and has an attractive valuation.

The companies that boosted distributions to shareholders over the past week that met our criteria above include:

AT&T Inc. (T), which provides telecommunications and digital entertainment services. The company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility, and International. The company raised its quarterly dividend by 2% to 50 cents/share. This marked the 34th consecutive annual dividend increase for this dividend champion. The company has tended to boost its quarterly dividend rate by a penny over the past five years. This is due to the high dividend payout ratio, and the very slow growth in earnings per share. Due to the high yield however, shareholders are happy with any raise they can get. The company managed to boost earnings per share from $1.94 in 2007 to $2.10 in 2016. The company is expected to earn $2.92/share in 2017. AT&T is a popular holding for many retirees looking for current income with its 5.20% dividend yield, which is adequately supported by its 69% forward dividend payout ratio. The intense level of competition is the only thing that has stopped me from owning AT&T. The stock is cheap at 13 times forward earnings and that yield of 5.20%. If the company manages to keep the dividend, it can generate very good returns to shareholders over the next decade. Unfortunately, when companies take on too many acquisitions with debt, they have prioritized debt repayment over dividend growth. Let’s hope that this is not the case for AT&T.

Dividends Are The Investors' Friend

I recently learned that John Bogle had mentioned my humble blog in his latest book "The Little Book of Common Sense Investing" from a book review by my friend Mark Seed.

Some excerpts from this article on dividends was mentioned at the end of a chapter on dividend investing titled " Dividends Are The Investor's (Best?) Friend". The chapter discusses the important contribution of dividends towards total returns for the US stock market since 1926. The chapter also discusses the importance of reinvesting those dividends over time. I like how he focused on the stability of dividend income over time, placing a chart of S&P 500 dividend payments since 1926. The only major declines in dividends occurred around the Great Depression in 1929 - 1932, also in 1938, and during the Great Financial Crisis in 2008. The rest of the time we have a smooth uptrend in dividends as whole, as US corporations tend to gradually increase those dividend payouts every year since 1926. The chapter also discusses the importance of keeping costs low, in order to keep the majority of your dividend income. The book will also resonate with dividend investors, since it preaches investors to focus on their dividend checks, and ignore focusing on the fluctuating values of their investments

The book is worth a read by investors from all levels of experience.

I am beyond honored that John Bogle, who is a giant in the field of investing is even aware of my site. Actually, saying I am honored is an understatement.

Nine Dividend Increases For Further Review

As part of our monitoring process, we review the list of dividend increases every week. In this monitoring process I review the rate of dividend increases for companies I own. This is one of the many ways to evaluate if my thesis is still working. I also use this tool as one of the ways to review companies I may be interested in buying at some point in time ( provided the price was good).

I also post these updates on this site to share with you how I quickly evaluate companies and either put them on the list for further research or immediately discard them for the time being. Since our time is limited, we want to focus it on the best opportunities, available at the best prices today, and place the rest of opportunities on hold.

For this weekly review, I focused on the dividend companies whose boards approved a dividend increase over the past week. All of these companies have managed to reward shareholders with an annual raise for at least a decade.

The companies include:

Don't Be An Arrogant Dividend Growth Investor

There are many risks to investing. One of the major risks that could ruin a portfolio’s chances of generating adequate dividends are purely psychological. Investors who act/are overconfident in their abilities, tend to rush through, and make silly mistakes that could be disastrous. Being cocky might work in certain areas of life, but not in investing on the financial markets.

One of the risks that overconfident investors take is when they create a concentrated dividend portfolio. These concentrated portfolios typically include no more than ten to fifteen individual securities. These cocky investors claim that they create these concentrated portfolios because they are only investing in their best ideas. According to these investors it is much easier to focus all your energy on ten individual stocks and research all there is to them, than to focus on thirty or more companies. The reason why I view these investors as overconfident is because they are forgetting that sometimes, no matter how great you are at analyzing investments, some unknown factor might cause you to still lose money. If just one out of ten companies eliminated dividends and fell substantially in the process, it could mean trouble. Contrast this to a portfolio of 30 companies, which is properly diversified and allocated to different sectors. An unexpected blow to one company would not jeopardize the dividend income stream.

Two dividend growth stocks raising dividends like clockwork

The appealing feature of the best dividend growth stocks is their ability to boost annual dividends like clockwork. This feature is even more appealing when strong dividend increases are supported by underlying growth in earnings.

Two prominent companies raised their dividends to shareholders in the past week. Both companies are high quality ones with wide moats. The companies include:

The Walt Disney Company (DIS) is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media.

Disney’s incomparable collection of iconic brands and franchises continues to deliver strong returns to shareholders, as the company raised its semi-annual dividend by 7.70% to 84 cents/share. This marked the 8th consecutive annual dividend increase for Disney. The new yield is 1.60%. Over the past decade, the company raised its dividend at an annual rate of 18.80%/year.

The strong dividend growth was supported by the increase in earnings from $2.28/share in 2008 to $5.69/share in 2017. Analysts expect the company to earn $6.23/share in 2018.

The stock is attractively valued at 16.90 times forward earnings. Check my analysis of Walt Disney Company for more information about the company.

McCormick & Company (MKC) is engaged in manufacturing, marketing and distributing spices, seasoning mixes, condiments and other flavorful products to the food industry, including retailers, food manufacturers and foodservice businesses. The Company's segments include consumer and industrial.

The company reiterated its commitment to dividend growth, by raising its quarterly dividend by 10.60% to 52 cents/share. This marked the 32nd consecutive annual dividend increase for McCormick. The new yield is 2%. Over the past decade, this dividend champion managed to grow its dividend at an annual rate of 9.10%/year.

The strong dividend growth was supported by the increase in earnings from $1.73/share in 2007 to $3.69/share in 2016. Analysts expect the company to earn $4.22/share in 2017.

The stock is overvalued at 24.40 times forward earnings. I would consider adding to my position on dips below $85/share.

Relevant Articles:

- The predictive value of rising dividends
- How to value dividend stocks
- How I Manage to Monitor So Many Companies
- The predictive value of rising dividends

Ten Dividend Growth Stocks For Retirement Income

If you are reading this site, chances are that your goal is to live off dividends in retirement. Dividends are more secure than share prices, which means that retirement income is much easier to project using dividend income. Dividend income is more stable than share prices, and it is easier to forecast. A retiree can easily figure out how much dividends will be generated by a company. On the other hand, no one has any clue whether the stock price will be up or down a year from now. This is the reason why retirees have been focusing their attention on dividend checks for decades. Rather than focusing on whether they stock market is up or down, these retirees focused on identifying companies with dependable dividends, margin of safety in dividend payments, and available at attractive valuations.

I went through my watchlist, and identified several promising dividend companies that have secure dividends. The companies include:

Five Companies Rewarding Shareholders With A Raise

As part of my monitoring process, I review the list of dividend increases every single week. I use this exercise to monitor existing investments, and to monitor the tone of companies I may be researching for potential acquisition. Dividend announcements provide a great glimpse about what management expects the near term business conditions to be.

Factors the boards of directors considers when setting the dividend include future earnings expectations, payout ratio, and dividend yield relative to those at peer companies, as well as returns available on other income oriented investments.

I then take those dividend hikes, and evaluate them against the past record, and look at the valuations to evaluate for potential entry points.

Over the past week, there were four dividend growth companies that announced their intent to reward their long-term investors with a dividend raise. The companies include:

Six Dividend Stocks Growing Shareholder Distributions

As part of my monitoring process, I review the list of dividend increases every week. I believe that this exercise provides a quick snapshot of the guidelines I have set up for my investing, and how I implement them with real world information.

In general I look for the following in evaluating companies ( my entry criteria).

1) A minimum of ten years of annual dividend increases
2) A P/E ratio below 20
3) A dividend payout ratio below 60%
4) Annual dividend growth that exceeds inflation
5) Analyzing the trends in earnings per share growth over the past decade
6) I do not have minimum yield requirements any more

Over the past week, the following companies raised dividends. The companies include:

The Pareto Principle In Dividend Investing

The Pareto Principle is an economic term invented by an Italian economist Vilfredo Pareto in the 20th century. It is also called the 80-20 principle, meaning that 80% of effects come from 20% of the causes. Vilfredo observed that 80% of the land in Italy is owned by 20% of the people. The ideas behind this principle are wide ranging in multiple fields, including investing. I am a firm believer that a small minority of the investments I make today will end up becoming so successful, that they will produce 80% of my investment gains over the next 40 - 50 years. This is why I am really careful about selling, even if a stock I own is up by 1,000%.

For example, in the book “The Tao of Warren Buffet “ written by Mary Buffett, I read that 90% of Warren Buffett’s returns came from just 10 stocks. I did some research, but unfortunately I was unable to find any detailed data behind this exercise.

For purposes of simplicity, Berkshire Hathaway (BRK.A) has accounted for over 99% of Buffett’s wealth. Before 1970, the Buffett Partnership accounted for majority of his wealth. This statement  is overly simplistic, as Buffeet had to make hundreds if not thousands of stock and business decisions, that compounded partners and shareholders net worths for decades. But the quote from above, discussed the investments that made Berkshire Hathaway what it is today.

General Electric Cuts Dividends For The Second Time In A Decade

You probably heard the news that General Electric is cutting dividends for the second time in a decade. The previous time when General Electric cut distributions was in 2009, during the financial crisis.

The dividend cut was not surprising, given the fact that the conglomerate had a high payout ratio amidst a stagnant trend in earnings per share.

For example, the company earned 99 cents/share in 2009, the first year after the financial crisis. By 2016, GE earned $1/share. At the same time, dividends per share grew from 61 cents/share to 93 cents/share. The company is expected to earn $1.07/share for 2017 and has paid 96 cents/share in dividends. The payout ratio was obviously too high, and unsustainable.

When you cannot grow earnings, and have a high payout ratio, you cannot pay dividends.

A lot of commentators saw the dividend cut as evidence against dividends however.

This doesn’t make any sense.

GE’s story is actually a cautionary tale against share buybacks.

A lot of investors are told that dividends and share buybacks are the same thing. It is a popular narrative that share buybacks and dividends are the same thing.

This is an incorrect statement.

Seven Dividend Paying Companies Rewarding Their Owners With a Raise

As part of my monitoring process, I review the list of dividend increases every week. I believe that this exercise provides a quick snapshot of the guidelines I have set up for my investing, and how I implement them with real world information.

In general I look for the following in evaluating companies ( my entry criteria).

1) A minimum of ten years of annual dividend increases
2) A P/E ratio below 20
3) A dividend payout ratio below 60%
4) Annual dividend growth that exceeds inflation
5) Analyzing the trends in earnings per share growth over the past decade
6) I do not have minimum yield requirements any more

Over the past week, the following companies raised dividends. The companies include:

What I learned from analyzing my investment record

I have been investing in dividend growth stocks over the past decade. I have shared with you my strategy, how I identify companies for research, how I analyze companies, how I select to buy them, and how I build a portfolio.

Regular readers know that I am truly passionate about investing. I have focused my attention to investing and business for almost 20 years, starting out as early as high school. One of the results of this is the fact that I try to gain more knowledge over time, in order to improve. The trait I picked from many of the books I have read is that successful investors tend to analyze their past investments, in order to uncover any recurring errors.

Inspired by this knowledge, I have tried to go back to my investment detail since 2008, and understand what errors have been made in order to avoid repeating them again. Making errors is natural if you are trying to achieve anything in life. What separates the winners from the losers is that the former study their successes, as well as failures, in order to improve. The superwinners are those who are smart enough to study other people’s mistakes, in order to avoid repeating them in their own situations. After all, life is too short as it is – therefore we do not have the time nor luxury to learn from mistakes that could have easily been avoided. This is the main reason I am sharing mistakes here – in order to help YOU avoid mistakes I have made.

Here is a short list:

1) Chasing yield is bad.

Many inexperienced investors believe that dividend investing is all about finding the highest yields possible. My worst mistakes have been in buying companies, mostly because they had a high current yield. While I had a process for investing, I convinced myself that those companies are something special, and that I should ignore any warning signs. The two companies where I chased yield were American Capital Strategies (ACAS) in 2008 and American Realty (ARCP) in 2013 - 2014. I was seduced by the high yields, and did not analyze the dividend safety in the skeptical manner that I should have. Long story short, both companies ended up eliminating dividends, and I sold at a loss. What saved me was the fact that none of them ever accounted for more than 1% of my portfolio. I have had other dividend cuts, but most of them were in entities that were able to pay dividends out of cash flow or earnings, and the business conditions turned sour or management decided to start off with a clean slate.

2) Selling is costly

Plenty of  investors tend to actively monitor their holdings on a regular basis. The problem with this exercise is that this monitoring can trigger your brain into doing things that you may later regret. One of those activities is selling a good company for a variety of BS reasons such as "noone goes broke taking a profit" or "the stock overvalued now, I will buy it later at a lower price" or "there is another stock that is cheaper"or "I can increase my yield by buying something else". I have made this mistake as well, selling perfectly good companies for no good reasons, only to replace them with companies that ended up sorely disappointing. In the majority of sales I had ever done, I realized that I would have been better off simply doing nothing. Worst of all, I also ended up paying taxes and commissions on selling, along with the steep opportunity cost of replacing a great company with a mediocre one.

If you want to look for examples, this post outlines a few. I am glad I have taken a more passive approach to my portfolio, where I almost never sell now ( unless I am forced to by a company being taken over)

Ironically, even selling after a dividend has not been a smart move for me either. I would have been ok simply holding off on the dividend cutters. My automatic rule has been to sell immediately after a dividend cut. I am seriously reconsidering this rule, and turning it into a guideline.

3) Keep costs low

In general, it is important to keep activity and turnover as low as possible. The case can be made that the investor should do a lot of regular buying over time, and very little, if any, selling. This ensures that costs are kept low, and the ability to make mistakes is reduced further.

When you keep costs low, this means there are more money working for you.

The appealing feature of dividend growth investing is the fact that once you purchase your equities, you are not charged a fee for holding on to your investments. These days, certain brokers such as Robinhood and Merrill Edge offer commission free trades to their clients. So it is even possible to have no investment costs whatsoever ( this is lower than most index funds even).

Most of my readers are also of the DIY type, who do no engage the services of an expensive investment adviser or an expensive mutual fund. If you pay 1% of assets under management to an investment adviser, you are essentially being charged a 33% annual tax on your dividend income, provided that your holdings yield 3%. It is no wonder that many financial advisers actively hate dividend investing - their services appear more expensive when framed as a tax on dividend income than as a fee on total assets under management. In addition, there are some said advisers who also sell mutual funds that cost 1% - 2%/year. This is highway robbery if you ask me.

When you avoid financial advisers, you get more money to keep for yourself. I am glad I always managed my own money, and never paid more than a commission here and there. When I did pay commissions, I always made sure that the total cost never exceeded 0.50% of the total transaction value.

4) Taxes matter ( to an extent)

Not maxing out retirement accounts was one of the mistakes I made in the first few years of my journey. When you generate investment income during your accumulation years, you have to pay taxes on it. Taxes are a real cost that reduced performance and dividend income available for you to spend or reinvest. We want to keep them as low as possible.

Even when you earn qualified dividend income, you still have to pay 15% - 20% to the friendly tax authorities ( in addition to state income taxes if you are in the highest tax brackets, plus a potential 3.80% medicare surcharge tax on top of that). Unfortunately, this presents a drag on the compounding process. Your goal as an investor is to have the maximum amount of money working for you, and not to lose any dollars to the tax man. Each dollar that doesn't compound for you, is a dollar lost forever.

Since my wake-up call in 2012-2013, I am maxing out everything available under the sun for me. This includes maxing out my 401 (k) ( both pre-tax and after-tax), SEP IRA, Health Savings Account (HSA) and Roth IRA. I am essentially to the point where my whole after-tax salary is placed in retirement accounts, while I spend my taxable dividends and side income for ordinary expenses.

The other thing to consider is to be as inactive as possible in your portfolio investment decisions. The more you trade, the higher the costs associated with this turnover. When you sell stock, chances are you may have to pay a tax on any gains generated in the process. This further reduces the amount of money left to compound for you. At this time, long-term capital gains are taxed similarly to qualified dividends. However, short-term capital gains are taxed at your ordinary income tax rates.

Of course, while taxes do matter, you should never let the tax tail wag the investing dog. Do not make investment decisions merely for the tax purposes. Always focus on the investment side first, and taxes second.

5) Diversification matters

I believe that diversification is the only free lunch available in investing. I subscribe to the idea of spreading my wealth in as many companies as possible. It is also important to think about spreading my wealth in other asset classes, provided that they offer attractive returns. Diversification is important, because the future is largely unknown. Spreading your investments means that you have a higher chance of being able to keep your wealth even if some of your assumptions are incorrect. It is important to own as many companies as possible, without sacrificing quality, in order to reduce the risk to wealth and income if one company doesn't perform as expected.  You do not want to be dependent on the success or failure of just a handful of investments. As your net worth increases past a certain point, it makes sense to focus more on wealth preservation.

After reviewing my investment record, I have recognized the fact that I never know which will be my best investments in advance. I can tell you on aggregate what I am looking for, but I never know which specific investment will perform as well as expected. This is why it makes sense to own as many companies as possible that meet my basic criteria, and to also buy them over time, as long as they offer good value for my money. This is why it also makes sense to equally weight positions in a diversified dividend portfolio. I want to give each company an equal chance of success.

While I make mistakes, their effect has not been threatening, because they had low portfolio weights. When you own an equal weighted portfolio of 100 individual companies, the worst that one company can harm you is a total loss of 1% of total net worth. Actually, the downside is much less than that,  because dividends reduce the amount at stake, and because I reinvest them selectively elsewhere. However, the upside in each position is virtually unlimited.

6) You make money by staying the course

This is the most important lesson for all of us. Staying the course through thick or thin has been the way to wealth in the US over the past two centuries.

It takes work to identify great companies, analyze them, and purchase them opportunistically at attractive prices. However, those items are just part of the success equation. It is very important to keep investing regularly, through thick or thin. It is even more important to patiently stay the course, and let the power of compounding do the heavy lifting for you.

The investor's chief enemy is likely to be themselves. I have seen too many investors trying to time the market and selling out, waiting for a correction or selling out in fear of losing money. Those are mistakes. The real money in investing is made by buying and patiently holding over many years. This is the lesson learned from studying the most successful dividend investors in the world.

While I have had a couple of companies cut dividends, I have also had an equivalent number of companies that have been multibaggers that have also generated double-digit yields on cost in a decade.

I never knew which of the companies I own will do the best. However, I do know that if I assemble a diversified portfolio of solid dividend blue chips over time, and purchase them without overpaying, I will come out ahead in the long run. As we all know, the slow and steady accumulation of income producing assets on a regular basis, and the patient compounding of dividends and capital over time will win the race and help us reach out goals.



As of the time of this writing, my forward dividend income has exceeded my dividend crossover point after a decade of saving and investing.


Relevant Articles:

- Should taxes guide your investment decisions?
- An Investment Plan Helps You Stay The Course
- My dividend crossover point
- Taxable versus Tax-Deferred Accounts for Dividend Investing
- How to become a successful dividend investor

The predictive value of rising dividends

Newton’s first law states that a body in motion at a constant velocity will remain in motion in a straight line unless acted upon by an outside force. While Newton lost a lot of money during the South Sea bubble in 1720 chasing hot stocks, he could have made a lot more simply by applying his findings to the world of investing in dividend stocks instead.

In my years of investing in dividend stocks, I have noticed that companies which consistently raise dividends every year tend to keep raising dividends going forward. Companies which sporadically boost dividends for short periods of time, only to freeze or cut them later tend to repeat this activity over and over throughout their corporate histories. Unfortunately, many dividend investors fail to learn from history. As a result, these investors hope for the best when dividends are kept unchanged or cut, and predict dividend cuts as the distribution is raised to record levels for many years.

The companies which tend to consistently raise dividends tend to have business models that deliver the type of sustainable earnings growth that supports dividend growth. These companies manage to expand their businesses by creating a plan and sticking to it, while capitalizing on long-term economic trends and keeping their business vibrant and innovative. In addition, many companies that have managed to achieve long streaks of dividend increases are owners of strong global brands, have strong competitive advantages and are able to deliver value added products or services, which are characterized by high quality. As a result, it would be very difficult for a competitor to steal away customers based on price alone. In order to steal customers away, a competitor would have to spend years losing money, before carving out a profitable niche in the industry. The high returns on equity result in businesses that generate so much in free cash flow, that they have to return some to shareholders. The high return on equity also translates into lower capital requirements to stay relevant or expand the business over time.

Robinhood Offers Free Stock Trading for Dividend Investors

Robinhood is a new broker, who lets customers purchase US stocks for no commission. Yes, that is true, customers pay no commissions when they purchase stocks using Robinhood.

The service is available for customers with iPhone's or Android phones. But starting in 2018, the service will also be available on the web too. I am very excited about where this broker is going next.

I believe Robinhood could provide much lower fees to many beginning investors. To me, it would be much nicer to be able to allocate $2,000 - $3,000 into shares of 10 – 15 companies every month without paying commissions, rather than be limited to 2 – 3 investments for that month. Long-time readers know that I do not want to pay more than 0.50% in commissions on my purchase amount, and I also rarely sell. Your assets at Robinhood  are also SIPC insured, meaning that your assets are protected for amounts under $500,000.

Eleven Dividend Champions For Further Research

Most dividend growth investors put money to work every single month. They build their portfolios over time, one dividend paying investment at a time. Thus, they take advantage of the powers of compounding, diversification and low costs. After all, once you purchase shares in a company, you do not pay any ongoing management fees to fund companies or investment advisers. This leaves more money to work for you. I am very proud by the fact that my writing has been empowering investors to get their fair share of returns.

One of the best ways to come up with ideas for further research is the list of dividend champions. I use it regularly in order to come up with companies for further research.

I was able to screen the list of dividend champions, against my screening criteria. The criteria I applied include:

1) Being member of the dividend champions list. This is an elite list of companies that have managed to boost dividends every single years for at least a quarter of a century.
2) Having a P/E ratio below 20. I have discussed below my reasoning behind using a P/E ratio of 20.
3) Dividend payout ratio below 60%. To me, having an adequate margin of safety in dividends is essential for sound dividend investing. I go beyond dividend payout ratios however – I also look at trends in earnings, dividends and the trend in the ratio itself. For this exercise, I included two companies that I believe will deliver satisfactory returns, whose payout ratios were above 60%. You will see them by browsing the list below
4) The company is able to grow earnings and dividends over the past decade. I took out companies that have not been able to grow earnings per share over the past decade. I am also watchful for companies where earnings per share growth has flattened over the past few years. Without earnings growth, we won’t be able to have dividend growth and the value of the business won’t increase.
5) Last, but not least I also removed companies that have been unable to grow distributions above the rate of inflation, and also have low yields today.

The results of the screen are listed below:

Six Dividend Growth Stocks Working Tirelessly For Their Owners

As part of my monitoring process, I review the list of dividend increases every week. I use this exercise to monitor performance on existing holdings, and also to uncover hidden gems for further research. When I purchase shares in a company at an attractive price, I expect trends in earnings per share and dividends per share to continue into the future. This dividend momentum is a very powerful force, because it can continue for decades, while richly rewarding shareholders with higher dividends and capital appreciation. However, it is also important to keep monitoring those holdings, in order to make sure that the business is still growing, and can afford to pay higher dividends to me.

It is always great to see companies I own continue to reward me with a raise. The amount of organic dividend increases I receive from my investments has always been higher than the raises I receive at work. And that is despite the fact that I have to spend a lot of time in the office, plus the obligatory after-hours commitment to the firm. This is the nice things about dividend growth investing - the companies work very hard for you, so that you don't have to.

In the past week, there were several companies on my watchlist, which raised their dividends to shareholders. With one exception, all of those have managed to reward shareholders with a dividend increase for at least ten years in a row. The exception is a spin-off from a dividend champion which had rewarded shareholders with a raise for over four decades.

The companies include:

How to Convert a portfolio of index funds to dividend stocks?

In a previous article, I discussed various ways that investors can accumulate their nest egg. One strategy includes putting a portion in one or a few attractively valued dividend growth stocks every single month, and reinvesting dividends selectively. The other strategy involved investing in index funds, using tax advantaged accounts such as 401 (k) for example.

Traditional vehicles for saving such as index funds and target-date funds work well when you accumulate your nest egg, but could present a challenge if you try to live off them. Many retirees prefer to have a stable and growing source of income, which maintains purchasing power over time, and is not dependent on the manic-depressive swings in stock prices. Therefore, investing in dividend growth stocks is the ideal way to generate income from your nest egg in retirement, due to the stability of dividend income. Therefore, if someone were to accumulate their nest egg in other items such as index funds, but wanted to convert to dividend investing, there are two ways that they can achieve that.

The strategies outlined in this article also work for situations where you have a lump sum amount, and you are thinking of investing it.

The first strategy involves selling all funds in your portfolio, and using the proceeds immediately to create a diversified portfolio of quality dividend paying stocks.

Four Dividend Growth Stocks to Consider on Dips

As part of my monitoring process, I review the list of dividend increases every week. This is in addition to the regular screening I do against the list of dividend champions and contenders.
I use this exercise as a way to monitor how companies I own are doing, and potentially uncover any attractively priced opportunities that my screens may have overlooked. Many times, I end up uncovering quality companies for further research that fit everything I am looking for, except for valuation. As a result, I tuck those companies on a waiting list. If they ever get close to my desired entry price, I get an alert and review the situations further.

In general I look for:

1) A history of dividend increases through a full economic cycle. A long streak of annual dividend increases is an indication that we have quality company with a strong track record for further research

2) A history of earnings growth. I believe that a company that grows earnings over time can withstand a large number of headwinds working against it.

3) A dividend that is well covered out of earnings. I require a margin of safety in dividends, for companies I am monitoring. I also require growth in earnings per share, in order to make sure that dividend growth does not occur solely by expansion of the dividend payout ratio

4) An attractive valuation. To me, this generally means a P/E below 20, coupled with a track record of earnings and dividend growth. A low valuation is not bullish in itself, if a company is not growing the bottom line.

After going through the list of companies that raised dividends over the past week, I identified four companies for further research.

The companies include:

Rising Earnings – The Source of Future Dividend Growth

Successful dividend investors understand that a steadily rising dividend payment only tells half of the story. Most dividend paying companies that have been able to consistently raise distributions for at least one decade have enjoyed a steady pattern of earnings during that period of time.

As a dividend growth investor, my goal is to find attractively valued stocks that consistently grow their dividends. I run screens on the list of dividend champions and contenders using my secret entry criteria, and then look at the list company by company. Not surprisingly, I look for a record of increasing dividends. But I look for much more than that in a company.

In a previous article I discussed the three stages that dividend growth companies generally exist in. My goal is to focus on those in the second stage, although I might occasionally select a company from the first phase. However, I try to buy not just companies that have a record of raising dividends, but those that have decent odds of continuing that streak for the next 20 – 30 years. Not every company will achieve that, but for those that do, they would generate the bulk of portfolio dividend growth. The hidden source of dividend growth potential is expected earnings growth.

As you can tell from looking at my stock analysis reports, I look for companies that can increase earnings per share over time. Rising earnings per share can essentially provide the fuel behind future dividend growth. For example, Colgate-Palmolive (CL) has increased dividends for 53 years in a row. The company has managed to increase EPS from $1.17 in 2004 to $2.72/share for 2016. This has allowed the company to increase annual dividends from $0.48/share in 2004 to $1.55/share. The rest has been invested back into the business, to fuel potential for more earnings growth.

Should I invest in General Mills?

General Mills, Inc. is a manufacturer and marketer of branded consumer foods sold through retail stores. The Company is a supplier of branded and unbranded food products to the North American foodservice and commercial baking industries. The Company has three segments: U.S. Retail, International, and Convenience Stores and Foodservice.

Today we are going to evaluate General Mills (GIS) against these simple four filters. In general:

1. I look for quality companies (evidenced by a long streak annual dividend increases)
2. I want them at an attractive valuation
3. I want EPS growth, to ensure future dividend growth and growth in intrinsic value over time
4. I want an adequate margin of safety in dividends

General Mills is a dividend achiever which has increased dividends to shareholders for 14 years in a row. The company and its predecessors have paid dividends without interruption for 119 years. Over the past decade, General Mills has managed to hike annual dividends at a rate of 10.40%/year.

How to determine if your dividends are safe

As dividend growth investors, our goal is to buy shares in a company that will shower us with cash for decades to come.

One of the important things to look out for in our evaluation of companies involves determining the safety of that dividend payment.

A quick check to determine dividend safety is by looking at the dividend payout ratio. This metric shows what percentage of earnings are paid out in dividends to shareholders.

In general, the lower this metric, the better. As a quick rule of thumb, I view dividend payout ratios below 60% as sustainable. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

For example, dividend king 3M (MMM) earned $8.16/share in 2016 and paid out $4.44 in annual dividend income per share. The dividend payout ratio is a safe 54%. This means that this dividend king is likely to continue rewarding its long-term shareholders with a dividend increase into the future. This will further extend 3M's streak of 59 consecutive annual dividend increases.

However, there are exceptions to the 60% payout ratio rule.

For example, companies in certain industries such as utilities have strong and defensible earnings streams. In addition, they can afford to distribute a higher portion of earnings as dividends to shareholders due to the stability of their business model.

Two Dividend Growth Stocks On My Radar

As part of my process, I tend to screen the list of dividend growth stocks regularly, in order to identify companies for further research. I also skim company press releases for announcements related to earnings and dividends. I was able to identify two dividend growth stocks, which seem to have been punished excessively as of recently. Those companies include Walgreen and CVS.

Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-led health and wellbeing company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The company is a dividend champion, which has managed to raise dividends to shareholders for 42 years in a row. The ten year dividend growth rate is 17.80%/year. Walgreens Boots Alliance has managed to grow earnings per share from $2.03 in 2007 to $3.82 in 2016. Forward estimates are for $5/share in 2017. Currently, the stock is attractively valued at 18.30 times earnings and yields 2.30%. Check my analysis of Walgreens for more information about the company.

CVS Health Corporation (CVS) provides integrated pharmacy health care services. It operates through Pharmacy Services and Retail/LTC segments. The company is a dividend achiever, which has managed to boost its dividend for 14 years in a row. The ten year dividend growth rate is 27%/year. CVS Health has managed to grow earnings per share from $1.90 in 2007 to $4.90 in 2016. Forward estimates are for $5.88/share in 2017. Currently, the stock is attractively valued at 15.20 times earnings and yields 2.70. Check my analysis of CVS Health for more information about the company.

Three Companies Rewarding Shareholders With a Raise

As dividend growth investors we are trying to identify quality companies with an established track record of annual dividend dividend increases, which are growing earnings, have sustainable dividends, and are available at an attractive valuation. If we identify enough such companies to add to our portfolio, we will be able to generate a sufficient stream of income to live off in retirement.

I identify such companies as part of my screening process, and as part of my monitoring process.

As part of my monitoring process, I review the list of dividend increases every week. I go through this exercise, in order to check if the companies I own are going to pay me more for owning them. I also use it to uncover hidden dividend gems for further research. Most importantly, this exercise is helpful as an educational tool, used best to reiterate what we are really looking for as investors.

The companies that recently announced their intention to reward shareholders with a raise include Honeywell International (HON), RPM International (RPM) and Northwest Natural Gas Company (NWN).

RPM International Inc. (RPM) manufactures, markets, and sells specialty chemical products for industrial, specialty, and consumer markets worldwide.The company raised its quarterly dividend by 6.70% to 32 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion.

Four Dividend Growth Stocks to Consider on Dips

I was able to identify a few dividend growth stocks that I find to be attractively valued today. That doesn’t mean that these companies will not decline further in share prices from here. It also doesn’t mean that those are recommendations for you to act upon. These are just a few companies that I believe are attractively valued today, and are likely to grow earnings and dividends over the next decade or so. If that thesis plays out, it is also likely that share prices will grow over time.

The companies include:

The J. M. Smucker Company (SJM) is a manufacturer and marketer of branded food and beverage products and pet food and pet snacks in North America. The Company's segments include U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Foodservice. The company is a dividend achiever, which has managed to increase dividends for 20 years in a row. Over the past decade, it has managed to boost dividends at a rate of 9.80%/year. Earnings per share grew from $3.03 in 2008 to $5.11 in 2017. The company is expected to earn $7.72/share in 2018. It is selling for close to 20 times earnings and yields 3%. It could be an interesting idea below $102 - $103/share. Check my analysis of J.M. Smucker for more information about the company.

Hormel Foods Corporation (HRL) is engaged in the production of a range of meat and food products. The Company operates through five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods,, and International & Other. The company is a dividend king, which has managed to increase dividends for 51 years in a row. Over the past decade, it has managed to boost dividends at a rate of 15.30%/year. Earnings per share grew from $0.55 in 2007 to $1.68 in 2016. The company is expected to earn $1.56/share in 2017. It is selling for close to 20 times earnings and yields 2.10% It could be an interesting idea below $33 - $34/share. Check my analysis of Hormel Foods for more information about the company.

The Walt Disney Company (DIS) is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The company is a dividend challenger, which has managed to increase dividends for seven years in a row. Over the past decade, it has managed to boost dividends at a rate of 18.80%/year. Earnings per share grew from $2.34 in 2007 to $5.76 in 2016. The company is expected to earn $5.81/share in 2017. It is selling for less than 20 times earnings and yields 1.60%. It could be an interesting idea below $105 - $106/share. Check my analysis of Walt Disney for more information about the company.

Altria Group, Inc.(MO) manufactures and sells cigarettes, smokeless products, and wine in the United States. The company is a dividend champion, which has managed to increase dividends for 48 years in a row. Over the past decade, it has managed to boost dividends at a rate of 11.60%/year. Earnings per share grew from $1.49 in 2007 to $3.03 in 2016. The company is expected to earn $3.26/share in 2017. It is selling for less than 20 times forward earnings and yields 4.10%. It could be an interesting idea around $61 - $63/share, or below. Check my analysis of Altria for more information about the company.

Relevant Articles:

- How to become a successful dividend investor
- Dividend Kings List for 2017
- How to value dividend stocks
- Why do I use a P/E below 20 for valuation purposes?
- Rising Earnings – The Source of Future Dividend Growth

Lockheed Martin Rewards Shareholders With A Raise

Lockheed Martin Corporation (LMT), a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. It operates through four segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems.

The company raised its quarterly dividend by 9.90% to $2/share. This marked the 15th consecutive annual increase for this dividend achiever. Over the past decade, the company has managed to boost distributions at a rate of 18.40%/year. This was supported by growth in earnings per share from $7.29 in 2007 to $12.42 in 2016. Lockheed Martin is expected to earn $12.64/share in 2017.

Currently, the stock is overvalued at 24.50 times forward earnings. The stock yields 2.60%.

The company has benefitted from share buybacks over the past decade. Lockheed Martin managed to reduce the number of shares outstanding from 416 million a decade ago to 291 million in the most recent quarter. Net income from continuing operations increased from $3 billion in 2007 to $3.753 in 2017. Earnings per share also received a large boost, because the valuations were very low a decade ago. Unfortunately, today shares are overvalued, but the company keeps buying them regardless of valuation. I believe that defense contractors are expensive at or above 20 times earnings. I would be interested in the stock when valuations are in the 15 – 16 times earnings range.

Relevant Articles:

- Dividend Achievers Offer Income Growth and Capital Appreciation Potential
- Lockheed Martin Corporation (LMT) Dividend Stock Analysis 2013
- Should Dividend Investors be Defensive about these stocks?
- How to value dividend stocks

Performance of Dividend Payers versus Non Dividend Payers in S&P 500

I recently obtained the data behind the performance behind dividend and non dividend payers in the S&P 500 per year. This is a calculation performed by the index committee that separates members of S&P 500 into dividend paying and non dividend paying, and then equally weighting those portfolios. The performance of an equal weighted portfolio of dividend stocks is compared to the performance of an equal weighted portfolio of non dividend paying stocks.

Source: S&P/Dow Jones Data

The number of dividend paying stocks has varied over time. Currently, there seem to be 419 companies paying a dividends, out of 505 members of the S&P 500 index ( the difference is due to the inclusion of multiple share classes on the same company – e.g. GOOG and GOOGL)
Most companies paying a dividend are in mature industries. Most dividend stocks tend to be value stocks, which tend to decline by less during bear markets but still provide sufficient upside during bull markets.

Three Quality Companies Raising Dividends and Returns

As part of my monitoring process, I review the list of dividend increases every week. This helps me keep a pulse of dividend growth stocks I own, as well as the ones I may be interested in at the right valuation.  The companies that raised dividends over the past week in review include Microsoft, McDonald's and W.P. Carey.

In general, we want dividend growth stocks which have raised distributions for at least a decade, which was possible due to growth in earnings per share, and we want those at an attractive valuation. The quick review of each dividend raiser is focused on these general points of interest.

McDonald’s Corporation (MCD) operates and franchises McDonald’s restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally.
The company hiked its quarterly dividend by 7.40% to $1.01/share. This marked the 42nd consecutive annual dividend increase for this dividend champion. As a McDonald's shareholder, I am lovin' it! I celebrated the dividend increase with the two cheeseburger number two meal at my local establishment. McDonald’s has managed to boost dividends at a rate of 13.70%/year over the past decade. This was supported by an increase in earnings from $1.93/share in 2007 to $5.44/share in 2016. The company is expected to earn $6.52/share in 2017. Currently, the stock is overvalued at 24.40 times forward earnings and yields 2.50%. McDonald's would be a better value on dips below $130/share, and an even better one on dips below $109/share. I came up with these values by multiplying the forward earnings for 2018 by 20 and the earnings for 2016 by 20.

Share Buybacks and Dividends Are Not The Same Thing

Share buybacks have gained prominence in the past twenty years. The amount corporations spend on buybacks exceeds the amount they spend on dividends. Plenty of investors mistakenly believe that dividends and share buybacks are equivalent.

They are not.

I prefer dividend payments. When a company declares and pays a cash dividend, this is yours to keep. You can do anything with that cash. The dividend represents a return on investment, and an instant cash rebate on your original purchase back. Every shareholders receives the same treatment per each share they own. Plenty of investors these days hate dividends, because of their tax inefficiency. When you earn dividend income, and you are in the high tax brackets, you can pay over 20% to the government. These investors forget that most stock in the US is now held in retirement accounts, where taxes are either deferred for decades or they are tax-exempt. So the easy solution for most investors in the US is to buy stock in retirement accounts.

When a company declares a buyback, not all shareholders are impacted the same way (this example of course assumes that the company indeed follows through with the buyback, which is not always the case). When a company declares and executes a buyback, and you do not sell, you won’t have to pay a dime in taxes. Plenty of people love this idea, and focus on the tax efficiency aspect above everything else. However, the investors who sold their shares back to the company have to pay taxes on any gains, assuming they held the shares in a taxable account. By the way, if an index fund holds the stock, it needs to sell a portion of the shares, because the float is reduced from the share buyback.

My Favorite Pick Right Now

This is a guest post written by Mike McNeil, author of the Dividend Guy Blog and co-founder of Dividend Stocks Rock. Mike is currently investing $100,000 in a 100% dividend growth portfolio as the market trades at an all-time high.

Regardless where I look these days, I read alarming news about the stock market. Government debts are through the roof, there are tensions among many countries, debt is “too cheap” and we make a bad use of it, interest rates are climbing up and the stock market doesn’t listen to reality, like Icarus reaching for the sun. As Icarus’s story, once our wings will be burned by the sun, the fall will be fatal. This is obvious; everything is set to have the market crashes and burns.

I recently quit my job as a private banker to work full-time on my investing website Dividend Stocks Rock (DSR).  This is how I received $108,000 as a lump sum for my pension. What am I going to do with this new money? What should I do as a dividend investor? Should I keep money aside and wait for a correction?

This could be argued to be an interesting strategy if you think you can time the market. However, for a dividend growth investor, we should all know that time in the market is a lot more important than market timing. We should ignore the noise and keep investing. This is what I’m doing anyway. I decided to invest it all in the stock market now; because when the stock market goes down like this:

Three High Yielding Dividend Machines Rewarding Shareholders With a Raise

Over the past several weeks, there were three high yielding dividend growth stocks that raised distributions for shareholders. I am going to do a quick review on all three, using my criteria for evaluating dividend growth stocks.

I review the list of dividend increases every week. I then narrow the list down based on a variety of criteria such as minimum streak of annual dividend increases. The end result from the list today includes three high yielding companies that raised dividends over the past two weeks. The companies include Philip Morris International Inc., Realty Income Corporation and Verizon Communications.

Plenty of retirees I have gotten in touch with over the years seem to own those dividend machines. The question is, are those still good ideas today for accumulation?

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products. The company raised its quarterly dividend by 2.90% to $1.07/share. This marked the 9th consecutive annual dividend increase for PMI. The new annualized dividend payment is $4.28/year. This is a decent rate of growth from the annualized dividend payment of $1.84/share in 2008.

My Take on Real Estate Crowdfunding

I have been reading about real estate crowdfunding platforms over the past several months. Many of these platforms seem to market to investors, showcasing high dividend yields in the 8% - 10%/year range.

I was intrigued, and tried researching those. After all, if I can obtain 10%/year investing in real estate easily, I can just retire and call it a day.

I read the following two articles in my research:

Investing with RealtyShares – see how I’m doing with real estate crowdfunding by Joe Udo

How To Invest In Real Estate Without Owning Real Estate by Mr 1500 Days.

I essentially posted the following comment on both blogs:

I believe that all of those platforms are still relatively untested. And probably giving those platforms a try could be worth it with what many refer to as “play money”.

Perhaps I do not understand these well enough and need to do more research. However, why would individual investors like you and me get a cut out of lucrative Fundrise/Mogul real estate deals, when other REITs (like the ones in VNQ) could be easily taking on those projects? I keep wondering whether those private placement real estate platforms just include mostly higher risk projects that more established players have passed up on, and may not deliver the total returns we want. The real test would be how these platforms would perform during the next recession. It would be interesting to check these out in a decade, and compare notes on how things progressed.

A decade ago, P2P loans were a new thing. Many people invested in them through Prosper & Lending Club, and the forward results were not good.

The Magic Dividend Cocktail

This is a guest post by Mr Tako, who writes about investing and financial independence over at Mr Tako Escapes. The author is a financially independent dividend investor, who focuses his time on his family, investing and blogging. Mr Tako is living off dividends in retirement, which is the ultimate goal for most of us.

The dream of dividend growth investing is a dream about passive income -- An ever growing stream of passive income that lasts for decades and requires very little work to maintain.
That was my dream anyway, and for the most part I achieved it.

Unfortunately, the dream of passive income is easier to dream about than it is to achieve.  It takes work.  Dividends don't just keep growing out of "thin air" -- Companies have to actively make the right moves to keep those beautiful dividends growing.

This means investors must also find the right companies to stay invested in -- the ones with dividends that grow faster than inflation for long periods of time.

How does an investor find companies like these?  One great place to start is by identifying the four methods by which companies grow dividends...

19 Dividend Champions For Further Research

One of the most important factors that separate winning investors from losing investors is the ability to develop a process that you stick to no matter what happens. When you have a process, you take guesswork out of investing, and you stick to the plan through thick or thin.

Ever since I started focusing on dividend growth investing a decade ago, I have been able to invest my savings regularly, using my process. My process for identifying companies is very simple:

1) I start with the list of dividend champions, which includes companies that have raised dividends each year for at least a quarter of a century. This requirement ensures that I focus on quality companies with lasting business models

2) I eliminate companies that sell at high P/E ratios above 20. I believe that even the best company in the world is not worth overpaying for. I would much rather buy a quality company at a favorable valuation, than overpay for future growth. Valuation is important.

3) I eliminate companies with high dividend payout ratios. Dividend safety is very important, which is why I want to have a margin of safety in order to lower the likelihood that dividends will be cut during the next recession. Since I plan to live off dividends in retirement, I only want to focus on the companies that can deliver dependable dividend income for me.

4) I also focus on companies that have managed to boost dividends by at least 3%/year over the past 5 and 10 years. We want companies whose dividend payments will at least match inflation.

5) Last but not least, we evaluate the ten year trends in company’s earnings per share. We want companies that grow earnings per share. This provides fuel for future dividend increases and increases the likelihood that the intrinsic value of the business grows over time.

The dumbest argument against dividend paying stocks

One of the dumbest arguments against dividend growth investing is showing a single investment that failed, and thus implying that the strategy is not good. An opponent of dividend growth investing would usually use a company like Eastman Kodak (KODK), General Motors (GM), or one of the major banks like Citigroup (C) as an example of type of stocks that investors believed to be buy and hold forever.

There are several logical flaws with this argument.

The first issue stems from the fact that only some of the banks used in this argument have ever been dividend growth stocks at the time of their demise. General Motors, which was one of the bluest of blue chips for decades, had never been a dividend growth stocks, because of the cyclical nature of its distributions. Eastman Kodak was a dividend achiever once, having raised dividends for 14 years in a row through 1975, when the Board of Directors elected to freeze distributions. This was over 37 years before the company declared bankruptcy. Since 1975, the company had raised dividends off and on, but never for more than five consecutive years in a row. After the company cut dividends in 2003 however, no objective dividend investor should have held on to the stock.

Most dividend growth funds, such as the Dividend Aristocrats and Dividend Achiever ones, as well as many dividend growth investors would dispose of a security after it cuts or eliminates dividends. I do so too, per my risk management guidelines.

The second issue with the argument is that it misses the fact that only a portion of investments will be winners.  The thing about every single investment strategy out there is that only a portion of the investments you make will be winners. Even Warren Buffett has not made money on every single investment he has made. The man is happy if he can find a 40% hitter, and stick to them. A rational investor cannot expect to win on every investment he or she makes. However, if they maximize their gains by sticking to their stock holdings that are successful, they would more than make up for the losers over time.

The person making the isolated example of failure, merely uses this "argument" as a means to weaken Dividend Growth Investing by focusing on isolated "failures", while forgettting about the big picture. That's in an effort to make the strategy they are selling look better. This is why dividend growth investing failures are always exaggerated, while dividend growth successes are simply ignored. But in reality, this is sloppy thinking, which shows the person arguing misses the forest for the trees.

The third issue with this argument is that it ignores how General Motors, Eastman Kodak and the banks such as Citigroup were actually part of the S&P 500 or Dow Jones Industrial's Averages at the times of their dividend suspension or cuts. These companies were once regarded as the bluest of blue chips, and were members of all other major proxies for US stocks. If these are examples that should prevent investors from following a certain strategy, it looks like since these companies failed, the argument should be that investors should not buy stocks or should not buy index funds altogether. It means you should never invest in equities ever again. If investors are afraid that one or several of the companies in their portfolio will fail at some point in the future, they should never invest in index funds, or follow any stock investment strategy. Now that I have stretched the original argument, hope you can see its ridiculousness.

The fourth issue with the argument is that it ignores the fact that dividend investors hold diversified income portfolios, consisting of over 30 individual securities. If a few companies that the dividend investor has identified fail, that would surely hurt. However, the portfolio base would not be in dire straits, as the rest of the components would pull in their weight and raise dividend income over time to eventually reach record territory once again.

Even index funds may not be a magic panacea for poor investor performance. If the investor panics during bear markets, takes excessive leverage, or decides to wait in cash for months or years until the prices get cheaper, they might not make much money. Of course, index funds change approximately 5% of components each year. Those indexes look like daytraders when compared to dividend growth investors, who rarely sell, and hold through thick or thin.

The fifth issue is that dividend paying companies pay dividends and may spin-off companies to shareholders as well. As I have discussed before, dividends represent a return on investment, as well as a return of investment. 

For example, General Electric stock in 2020 is back to where it was at the end of 1992.

Yet, if you had bought 1 share of the stock for $6.86 at the end of 1992, you would have collected $17.80/share in total dividend income through 2020. The amount received in dividends is over two and a half times the amount of the original investment. If you reinvested those General Electric dividends, you end up with 7.69 shares of General Electric which is not bad.

Now imagine if you reinvested each quarterly dividend in a different company or a portfolio of companies. That money could have been invested elsewhere, and generate a respectable rate of return.

Other times, companies may spin-off subsidiaries. Eastman Kodak is one such example. The company went bankrupt in 2012, wiping out its shareholders.

If you invested $1000 in Eastman Kodak in 1957, kept spin-offs and invested dividends you would have $64,000 today.

Your positive returns are entirely due to the 1994 spin-off of Eastman Chemicals (EMN)

Few investors seem to think about investments like a business owner. And it shows.

The last issue with the argument is that it never provides alternatives to dividend investing. As a dividend investor I have spent thousands of hours researching and fine-tuning my investment strategy, and by digging through the information about the companies I am interested in. I have chosen to follow a strategy because it fits my goals and objectives. I typically ignore naysayers who tell me my strategy is bad, without providing me any clear alternatives to that.

In my dividend investing I expect that roughly 20% or so of companies I invest in will generate the majority of dividend and capital gain profits. The remaining will either break even or produce net investing losses. If the companies in the winning group go up tenfold in value with dividends reinvested over the next 20 years, with 40% doubling on average, while the companies in the losing group lose 50% of their value, I would expect that I would end up with a portfolio that could triple in value over a 13 - 14 year time period.

You are not going to come up ahead on all investments you make in your lifetime. But if on aggregate the ones you own end up throwing up more in income over time, you should do quite well for yourself.

In order to find quality dividend stocks for my portfolio, I start with the list of dividend champions, take them through my screening criteria, and then analyze each candidate one at a time. I then do the same exercise using dividend contenders/dividend achievers lists and try to make investments every month in those that offer the best values at the moment.

Full Disclosure: None

Relevant Articles:

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