Dividend Investing Basics

I recently commented that dividend investing may be a key part of my retirement plan, but also admitted that I didn’t know much about it.

I’m in the midst of studying the strategy, seeing if it has legs, and deciding if I can (and want to) make it a solid part of my retirement plan. To do this, I recently went to my local library and ordered a few books on dividend investing.

Today I’ll share what I’ve learned so far on my journey.

The Concept

From what I understand, proponents of dividend investing tout it as working as follows:

• Buy stocks of good quality companies that pay decent dividends (which would be 3% to 5% these days.)
• Earn income generated from the dividend payments.
• Get some growth on the value of the stocks paying the dividends.

So to make this a bit more tangible, let’s take the following example:

• You buy a portfolio of stocks for $500k.
• These stocks pay you a 4% dividend of $20,000.
• The stocks appreciate 4% over the course of the year and are worth $520,000 at the end of year one.

In this example, your stocks have had a total return of 8% (which is completely reasonable) through the combination of dividends and growth.

Most dividend investors would look for their investments to beat the major market indices. I don’t need to go that far. All I need is some income and enough growth to make up for rising inflation (I’m figuring on 3% income and 3% growth). If I get extra return, that’s great, but I don’t need it.

Five Reasons Why Dividend Investing Works

But that’s my take on why dividend investing works (and how it works). What do the “experts” say? In All About Dividend Investing, Second Edition (All About Series), the authors offer the five reasons why dividend investing works as follows:

1. Dividends provide a steady stream of income.

2. Dividend stock prices increase over time.

3. Dividend reinvestment allows investment to grow at a compounded rate.

4. Dividend reinvestment promotes dollar cost averaging.

5. Dividend-paying stocks generally have lower price volatility.

I especially like the first two since they will be the main reasons I pursue this strategy (if I ultimately decide it does work for me).

Success of Dividend Investing

Continuing on the learning path, I’ve found that there are a seemingly myriad number of ways that dividend stocks can be picked (and even if you use stocks at all — some people suggest mutual funds). But no matter what you use, the advocates for dividend investing seem pretty confident of its success.

Consider this quote from The Motley Fool Million Dollar Portfolio LP: How to Build and Grow a Panic-Proof Investment Portfolio:

And so here’s one key takeaway: Dividend-paying companies are surer bets as investments since, on average, they operate in mature industries and enjoy steady flows of earnings. There is a reason why we have launched our book’s examination of investment strategies by focusing first on dividends — this is the safest way to invest in equities.

And later they say:

A truckload of academic studies has shown that investing in companies that pay dividends is just about the best way to earn huge returns over time.

Again, they are looking at dividend investing compared to all the other investing strategies and saying it’s one of the best. I don’t need it to be one of the best — I have a much lower hurdle to jump. This gives me a margin of safety which I like.

Similar sentiments are given in Beating the S&P with Dividends: How to Build a Superior Portfolio of Dividend Yielding Stocks. They sing the praises of dividend investing as follows:

It is a common misconception that most of the returns to investors who invest in stocks have come from capital growth. However, since 1926 nearly half of the 10.3% annual stock market return has come from dividends and dividend reinvestment. As an example, over the past 70 years, ending December 31, 2002, dividends contributed almost 40% of the average annual return of stocks on the S&P 500 Composite Index.

There are a number of formal studies that have found dividend stocks provide higher returns. For example, one study of monthly returns by S&P 500 companies over 31 years found that dividend-paying companies significantly outperformed non-dividend-paying firms by 0.37% per month.

Of course these books have a certain point of view they are trying to sell, so such statements aren’t surprising. That said, the fact that there are studies showing that dividend stocks do well is at least a partial boost for the strategy.

That’s about as far as I’ve gotten into my investigation of the topic. Obviously I still have a long way to go and there’s still a HUGE question out there (how do I find the right stocks that deliver the results I want?) If you have any thoughts on what I should consider as I proceed, I’d love to hear them. Or if you’re a dividend investor yourself, perhaps there are some words of wisdom you can share.

Dividend Growth Investing Is A Perfect Strategy For Young Investors

Imagine your perfect day. You wake up when you are rested, without the need of any alarm clocks. You then do some working out , followed by having a nice healthy breakfast. You then read at your leisure, have a lunch later in the day to beat the 11:30 – 1 pm crowds, and then review your brokerage accounts. You notice dividends from several companies are deposited today, and you decide to transfer them to your checking account. You check for any major items concerning your portfolio holdings, and spend a few hours researching a new dividend stock.

After that you get more time to concentrate on your activities, be it volunteering at the local homeless shelter, mentoring high school students, learning a new language or simply catching up on some good books. Later that day, you might decide to enjoy a few with your mates/gals. This dream is brought to you by dividend investing.

This is my retirement dream in a nutshell. The reason I started Dividend Growth Investor blog in 2008, is to write down ideas on how to make it happen. I believe that dividend growth investing works for all investors, regardless of their age. However, I do realize that older investors might have a preference for higher yielding stocks, while youngsters like myself can afford to build portfolios across the yield spectrum.

One of the most common misconceptions about dividend investing, however, is that it is not a good strategy for building your nest egg, and therefore it is not suitable for younger investors. Being a youngster myself, I (not surprisingly) disagree.

Younger investors are typically told to take a lot of risks early on, because they have time to recuperate those losses. I find this saying to be very dangerous for young investors. The problem is that taking risk is important, but it should not mean gambling. Investors should only be taking on large risks when they have a strategy with positive expectancy of a positive return, while risk is minimized. If you invest in penny stocks, social media stocks, or if you bought dot-coms during the tech boom of the late 1990s, you took huge risks but you were likely making concentrated gambles. There is a cost to gambling, because losing your entire nest egg of $10,000 at the age of 24 means you will be poorer by $800,000 by age 70. This calculation assumes a 10% annual return for 46 years.

In contrast, with a typical dividend growth strategy, you get a slow and steady approach that will lead to a monthly passive income that will pay your expenses in retirement. Starting out early will be beneficial, because you would gain the necessary experience through trial and error, and find out the nuances that work out for you. This would make you successful, and ensure that you maintain your success in investing. A big part of investment success is not losing too much in your investment career.

With this dividend strategy, we are focusing not on net worth per se, but on target annual dividend income. If your goal is to have a net worth of $1 million dollars, but you end up investing it in a relatively illiquid asset such as a personal residence, you might not be able to retire entirely on it. In some parts of the U.S., you might have to pay $20 – $30 thousand in annual property taxes plus paying for upkeep, maintenance etc. If, instead, you had a rental property generating $4,000 in monthly income or a portfolio of dividend stocks generating a similar amount, you might be set for life.

I believe that a new investor who does not have a lot of money today but who plans on accumulating their “financial nut” over the next years will be perfectly able to utilize dividend growth investing. With this strategy investors turbocharge the dividend income growth of their portfolios by putting money to work every month in stocks that regularly boost dividends, and then reinvesting those dividends selectively.

Since 2008, I have been on a mission to build up my portfolio income. Every month, I save an amount of money that I deposit in my brokerage account. I scan the market for investment opportunities all the time, followed by analyzing prospective investments. I identify dividend stocks for further analysis either by running my screening criteria against the dividend champions or contenders lists, by looking at weekly list of dividend increases as well as through interactions with other investors and the general method of my inquiry into business.

I do a complete stock analysis of each company I find interesting, in order to gauge whether the company in focus has any competitive advantages, pricing power and whether there are any catalysts for further expansion in revenues and profitability going forward. I focus on companies that can grow earnings over time, which will provide the fuel for future dividend increases. A rising earnings stream is also positively correlated with an increase in stock prices. You can have your cake and eat it too with dividend growth stocks.

My goal is to acquire the quality companies identified for purchase at attractive valuations. Entry price does matter to an extent, because a lower price provides a higher margin of safety in the investment and is equivalent to a higher dividend income. Of course, if you plan on holding stocks for 20 – 30 years however, it would not really matter whether you purchased Johnson & Johnson (JNJ) at $70/share or $75/share. If you overpay today however, it might mean that your returns in the first five years might be below average, until the growing earnings result in a valuation compression that would make the stock attractively valued today.

For my personal portfolio, I try to generate annual dividend growth in the 6-7% range on aggregate. My portfolios also yield approximately 3.50% – 4%. I achieve these aggregate figures by stacking three different types of dividend growth stocks, for maximum results. So far, I am able to cover approximately 50% of my expenses from my dividend income.

A few good picks include:

Coca-Cola (KO) engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has increased distributions for 51 years in a row. Over the past five years, Coca-Cola grew distributions at a rate of 8.40%/year. Currently, the stock is trading above the 20 times earnings limit I have set for myself, but yields a very respectable 2.80%.

Phillip Morris International (PM) manufactures and sells cigarettes and other tobacco products. The company has managed to grow distributions by 13.10%/year since the spin-off from parent Altria Group (MO) in 2008. I like the economics of the tobacco business, without the liability stemming from doing business in one country. PMI’s revenues are generated outside the U.S., and therefore are not dependent on a single country’s onerous laws on smoking. Currently, the stock is trading at 16.60 times earnings and yields 3.90%.

Kinder Morgan Inc (KMI) is the general partner of Kinder Morgan Partners (KMP) and El Paso Pipeline Partners (EPB). It also owns limited partnership interests in KMP and EPB. The most important asset is the incentive distribution rights structure, which provide for a 50% share of any future distributions growth over a certain threshold for KMP and EPB. Given the growth projections for energy assets in the U.S., and Kinder Morgan in particular, this stock can achieve high single digit dividend growth for at least the next five years. Currently it is yielding a very attractive 4.20%.

Procter & Gamble (PG) engages in the manufacture and sale of a range of branded consumer packaged goods. This dividend king has increased distributions for 57 years in a row. Over the past five years, Procter & Gamble has managed to boost distributions at a rate of 12.20%/year. Currently, the stock is trading at 17.20 times earnings and yields a very respectable 3.10%.

Let’s see how a portfolio stacks, where a young dividend investor puts $3000/month in 4% yielders that grow at 6%/year.

After five years with this approach, you would be earning $750 in monthly dividend income. Ten years after starting this strategy you will be earnings $2,000 in monthly dividend income. Fifteen years after beginning your dividend investment journey, you will be making almost $4,000 in monthly dividend income. This slow and steady approach is very boring, and it is not as exciting as tripling your money in Tesla (TSLA) in less than a month. However, more investors who focus on long-term wealth accumulation potential of dividend growth stocks will be better off than investors who gamble on the next big growth stock.

An investor with a vision will look beyond the 3%- 4% current yields today, but look at the potential for higher distributions over time. An investor that starts small at a young age, builds a diversified portfolio of income producing securities with growing distributions when valuations are right, reinvests these rising distributions into more stock and continuously adds to his portfolio, will achieve wealth at a relatively young age.

Source: http://seekingalpha.com/article/1530802-dividend-growth-investing-is-a-perfect-strategy-for-young-investors

Dividend Growth Investing Is A Perfect Strategy For Young Investors

Imagine your perfect day. You wake up when you are rested, without the need of any alarm clocks. You then do some working out , followed by having a nice healthy breakfast. You then read at your leisure, have a lunch later in the day to beat the 11:30 – 1 pm crowds, and then review your brokerage accounts. You notice dividends from several companies are deposited today, and you decide to transfer them to your checking account. You check for any major items concerning your portfolio holdings, and spend a few hours researching a new dividend stock.

After that you get more time to concentrate on your activities, be it volunteering at the local homeless shelter, mentoring high school students, learning a new language or simply catching up on some good books. Later that day, you might decide to enjoy a few with your mates/gals. This dream is brought to you by dividend investing.

This is my retirement dream in a nutshell. The reason I started Dividend Growth Investor blog in 2008, is to write down ideas on how to make it happen. I believe that dividend growth investingworks for all investors, regardless of their age. However, I do realize that older investors might have a preference for higher yielding stocks, while youngsters like myself can afford to build portfolios across the yield spectrum.

One of the most common misconceptions about dividend investing however is that it is not a good strategy for building your nest egg, and therefore it is not suitable for younger investors. Being a youngster myself, I (not surprisingly) disagree.

Younger investors are typically told to take a lot of risks early on, because they have time to recuperate those losses. I find this saying to be very dangerous for young investors. The problem is that taking risk is important, but it should not be mean gambling. Investors should only be taking on large risks when they have a strategy with positive expectancy of a positive return, while risk is minimized. If you invest in penny stocks, social media stocks, or if you bought dot-coms during the tech boom of the late 1990s, you took huge risks but you were likely making concentrated gambles. There is a cost to gambling, because losing your entire nest egg of $10,000 at the age of 24 means you will be poorer by $800,000 by age 70. This calculation assumes a 10% annual return for 46 years.

In contrast, with a typical dividend growth strategy, you get a slow and steady approach that will lead to a monthly passive income that will pay your expenses in retirement. Starting out early will be beneficial, because you would gain the necessary experience through trial and error, and find out the nuances that work out for you. This would make you successful, and ensure you maintain your success in investing. A big part of investment success is not losing too much in your investment career.

With this dividend strategy, we are focusing not on net worth per se, but on target annual dividend income. If your goal is to have a net worth of $1 million dollars, but you end up investing it in a relatively illiquid asset such as a personal residence, you might not be able to retire entirely on it. In some parts of the US, you might have to pay $20 – $30 thousand in annual property taxes plus paying for upkeep, maintenance etc. If instead you had a rental property generating $4,000 in monthly income or a portfolio of dividend stocks generating a similar amount, you might be set for life.

I believe that a new investor who does not have a lot of money today but who plans on accumulating their “financial nut” over the next years will be perfectly able to utilize dividend growth investing. With this strategy investors turbocharge the dividend income growth of their portfolios by putting money to work every month in stocks that regularly boost dividends, and then reinvesting those dividendsselectively.

Since 2008, I have been on a mission to build up my portfolio income. Every month, I save an amount of money that I deposit in my brokerage account. I scan the market for investment opportunities all the time, followed by analyzing prospective investments. I identify dividend stocks for further analysis either by running my screening criteria against the dividend champions or contenders lists, by looking at weekly list of dividend increases as well as through interactions with other investors and the general method of my inquiry into business.

I do a complete stock analysis of each company I find interesting, in order to gauge whether the company in focus has any competitive advantages, pricing power and whether there are any catalysts for further expansion in revenues and profitability going forward. I focus on companies that can grow earnings over time, which will provide the fuel for future dividend increases. A rising earnings stream is also positively correlated with an increase in stock prices. You can have your cake and eat it too with dividend growth stocks.

My goal is to acquire the quality companies identified for purchase at attractive valuations. Entry price does matter to an extent, because a lower price provides a higher margin of safety in the investment and is equivalent to a higher dividend income. Of course, if you plan on holding stocks for 20 – 30 years however, it would not really matter whether you purchased Johnson & Johnson (JNJ) at $70/share or $75/share. If you overpay today however, it might mean that your returns in the first five years might be below average, until the growing earnings result in a valuation compression that would make the stock attractively valued today.

For my personal portfolio, I try to generate annual dividend growth in the 6-7% range on aggregate. My portfolios also yield approximately 3.50% – 4%. I achieve these aggregate figures by stacking three different types of dividend growth stocks, for maximum results. So far, I am able to cover approximately 50% of my expenses from my dividend income.

A few good picks include:

Coca-Cola (KO) engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has increased distributions for 51 years in a row. Over the past five years, Coca-Cola grew distributions at a rate of 8.40%/year. Currently, the stock is trading above the 20 times earnings limit I have set for myself, but yields a very respectable 2.80%. Check my analysis of Coca-Cola.

Phillip Morris International (PM) manufactures and sells cigarettes and other tobacco products. The company has managed to grow distributions by 13.10%/year since the spin-off from parent Altria Group (MO) in 2008. I like the economics of the tobacco business, without the liability stemming from doing business in one country. PMI’s revenues are generated outside the US, and therefore are not dependent on a single country’s onerous laws on smoking. Currently, the stock is trading at 16.60 times earnings and yields 3.90%. Check my analysis of PMI.

Kinder Morgan Inc (KMI) is the general partner of Kinder Morgan Partners (KMP) and El Paso Pipeline Partners (EPB). It also owns limited partnership interests in KMP and EPB.  The most important asset is the incentive distribution rights structure, which provide for a 50% share of any future distirbutions growth over a certain threshold for KMP and EPB. Given the growth projections for energy assets in the US, and Kinder Morgan in particular, this stock can achieve high single digit dividend growth for at least the next five years. Currently it is yielding a very attractive 4.20%.

Procter & Gamble (PG) engages in the manufacture and sale of a range of branded consumer packaged goods. This dividend king has increased distributions for 57 years in a row. Over the past five years, Procter & Gamble has managed to boost distributions at a rate of 12.20%/year. Currently, the stock is trading at 17.20 times earnings and yields a very respectable 3.10%. Check my analysis of Procter & Gamble.

Let’s see how a portfolio stacks, where a young dividend investor puts $3000/month in 4% yielders that grow at 6%/year.

After five years with this approach, you would be earning $750 in monthly dividend income. Ten years after starting this strategy you will be earnings $2,000 in monthly dividend income. Fifteen years after beginning your dividend investment journey, you will be making almost $4,000 in monthly dividend income. This slow and steady approach is very boring, and it is not as exciting as tripling your money in Tesla (TSLA) in less than a month. However, more investors who focus on long-term wealth accumulation potential of dividend growth stocks will be better off than investors who gamble on the next big growth stock.

An investor with a vision will look beyond the 3%- 4% current yields today, but look at the potential for higher distributions over time. An investor that starts small at a young age, builds a diversified portfolio of income producing securities with growing distributions when valuations are right, reinvests these rising distributions into more stock and continuously adds to his portfolio, will achieve wealth at a relatively young age.

http://www.istockanalyst.com/finance/story/6478940/dividend-growth-investing-is-a-perfect-strategy-for-young-investors

Delaying Gratification? What's Gratifying To You?

My strategy is simple. I live on less than most – saving over 50% of my net income, year in and year out. This year I’m on pace to save over 60% of my net income. I use the savings from intense budgeting to invest in high quality companies that pay rising dividends. I’ll then one day live off the dividend income my portfolio provides. This is all part of my plan to retire by my 40th birthday.

Sounds great, right? Not so fast.

Some people seem to think the delayed gratification of living on so little now isn’t worth it because tomorrow isn’t promised. They say you should live like today’s your last day because it’s all about YOLO, yo.

Well, what is delayed gratification? Per Wikipedia, delayed gratification is the ability to resist the temptation for an immediate reward and wait for a later reward. Generally, the later reward is larger than the immediate reward would have been. That’s the benefit of delaying gratification. You get less now for more later.

But I’m not quite so sure I’m delaying gratification by living on little, and I’m actually going to make the argument that I’m doing the opposite. I would call what I’m doing hastening gratification.

I know what’s gratifying to me. Time. Time is everything, because without it we’re nothing. Therefore, the ultimate gratification for myself is to have as much of it as possible. And that’s precisely why I’m on the path to reach financial independence at such an early age. I can think of nothing more gratifying than having all my time to myself. Need six months off to travel? Being financially independent means you don’t have to ask your boss for six months off. You do whatever you want. What could possibly be more gratifying than that; doing whatever you want whenever you want?

Living on relatively little is easy for me because I don’t find a great deal of gratification in spending my money on things that I know won’t bring lasting joy. Who wants to own a bunch of stuff when I could one day own all my time? What possibly could you want to own more in life than your own time? I’m not really delaying gratification by budgeting, saving and investing. Every single day is gratification because I know all of these steps are bringing me one step closer to what’s truly gratifying and rewarding: complete and utter freedom! The totality of the rest of my life all to myself, free to spend how I please.

If you enjoy spending money on 6-8 restaurant visits per month, 2-3 cars in the driveway, a large home, cable TV subscription, 2-week international travel jaunts, and a closet full of designer clothing, then living like I do would probably be quite a struggle for you. And if you truly find great joy from this lifestyle then perhaps delaying gratification today for even more of this lifestyle in the future might not be worth it for you. But I do beg of you to take a look deep inside yourself and make sure you’re happy. If you’re happy making lots of money and spending most of it, then I say more power to you. Living on less to have more time isn’t for everyone, and neither should it be.

However, for the rest of us there is only so much consumption that can possibly be fulfilling.

Courtesy: Your Money or Your Life

This concept, from one of my favorite books, Your Money or Your Life, is The Fulfillment Curve. It basically tries to graphically demonstrate that there is a level of spending and consumption that leads to optimal fulfillment. This concept is a derivative of marginal utility. Too much of anything is a bad thing, and moderation in life is important. Living in your car is probably going to be very cheap, but also lead to a very unfulfilled, and potentially dangerously depressing life. On the other hand living in a castle that you can’t afford even with three jobs is only going to lead to a very stressful and unhappy life, and probably land you back to living in your car.

You could probably argue I live somewhere between “Survival” and “Comforts” currently. But the greater I allow myself to scale off to the right the longer I’ll have to truly delay the one thing that I find gratifying: freedom. And that’s exactly it. By living like I do I’m not delaying gratification, because I find gratification in freedom. By not having my freedom right now, everything I do is delaying the day when I’ll own my own time and have my life all to myself. By living on less and forgoing many things that don’t really bring me happiness I’m hastening gratification.

Thanks for reading.

Photo Credit: Naypong/FreeDigitalPhotos.net

Source: http://www.dividendmantra.com/2013/06/delaying-gratification-whats-gratifying.html

Why Dividend Investing Will Always Be Better Than Buying The Entire Stock Market

By Mike

I’ve read a lot of comments about the potential dividend bubble for the past 12 months. Some investors are afraid to see so much money leaving bonds and money market funds to be piled into dividend-paying stocks. Most investors are craving for revenue and dividend stocks are pretty much the answer to this desire… unless they continue to starve with their bonds and CDs paying less interest than I pay my kids!

But the fact remains: dividend investing is far more solid than a simple bubble created by a few retirees looking to receive a big fat check every month. While this investing strategy might look like flavor of the year since 2009, I can tell you it will continue to work out for decades to come.

Dividend Investing has Outperformed the S&P 500 Since The Very Beginning

You can do some research on the Internet, the conclusion will always include the same fact: dividend growth stocks generate a better return than pure capital appreciation. In fact roughly 50% of the total stock market return comes from dividend payouts. Trying to select pure growth stocks without dividends is like claiming you can ignore 50% of the stock market return in your portfolio.

(click to enlarge)

But following a few case studies and buying dividend stocks for that sole reason would be a bit simplistic… even borderline stupid. It’s your money after all. Are you here to make money or to gamble it on some geek studies?

Let’s dig deeper to see if there is a reason why dividend stocks are better than any others…

Dividend Payouts Require Cash Flow

By definition, a dividend is paid from a company’s after-tax money. Therefore, the company must first generate sales, then earn sustainable profits, pay its taxes, save/invest for the future… and then pay dividends to its investors. There is no point of bleeding the company’s cash flow into dividends simply to please investors. Most companies are paying a dividend because they make money and believe they will continue to do so in the upcoming years. Isn’t this the first reason why you would buy shares of a business in the first place: because your investment will generate positive future cash flow? A company paying dividends strongly believes in its ability to do so.

Dividend Growth Requires Profit Growth

Thinking that any stock paying a distribution is a good fit for your portfolio would be, here again, kind of ridiculous. There are multiple reasons to pay dividends besides having a sound balance sheet:

• It may want to attract more investors, pushing the stock value higher.
• It may be done to please a major investor who wants money back.
• The management might have overestimated its capacity to growth the business in the future.
• The management might have underestimated competition.

Since picking just any stock with a dividend yield is not sound investing practice, the second step would be to pick a stock with a positive dividend growth for at least five years. You can become quite picky and require stocks with up to 25 consecutive years of dividend growth. They are called the Dividend Aristocrats.

A constant dividend growth requires, by definition, a constantly growing profit. Therefore, if you pick a company that increases its dividend payouts by 5% for the past 10, 15 or 25 years, chances are its profits are following the same trend. I’m asking you once again: wouldn’t you like to buy a company that believes whole-heartedly in its ability to generate future positive cash flows PLUS showing a strong history of profit growth? We are getting closer to what any investor would call a “perfect investment”, right?

Profit Growth Requires Sales Growth

It is true that a company could cut its costs for a few years and generate profit growth this way. This is a good solution to cut fat but management must make sure it doesn’t cut too much and jeopardize future growth.

This is why I like to combine both sales and earnings per share on the same graph. I want to make sure that both are on an uptrend. A company making more profit but showing a slowdown in sales or, worse, a decline will lift a red flag. On the other hand, a company with both sales and profits going up will definitely lead to more dividend growth in the future. This is how you can beat the market.

Here’s McDonald’s (MCD) example where sales, profits and dividends are growing while the payout ratio is decreasing (due to a bad year in 2008 where the payout ratio was much higher than previous years).

(click to enlarge)

Sales Growth Requires Competitive Advantage

What’s the best reason a company’s sales grow? The company has a competitive advantage. It can be total leadership in its market, new innovative products, better locations, better process, strong branding, etc, etc, etc.

A company without a competitive advantage can’t really push its sales higher over several years. It will rapidly hit the ceiling and will have to cut on its costs to increase its profit. It will eventually hit them as you can’t continue to grow simply by cutting costs.

By selecting a dividend growth stock, you select a company with strong cash flows coming from increasing profits generated from more sales. Sales growth is often linked to a competitive advantage. Aren’t we drawing the picture of a perfect company for any investor by now?

Investing in Companies with Competitive Advantage is the Key in Becoming a Successful Investor

Regardless of your investment strategy, you will be investing for several years. Most investors have money allocated to investments for more than 10 years. If you don’t want your face pressed up against your trading screen for the next 10 years, you might want to select a more passive investing approach than day trading.

The best way to become a successful investor for the next decade is to find companies with competitive advantage. It is sometimes hard to define what kind of advantage is sustainable or not. This is why I focus on dividend-growth stocks to make sure I pick businesses with all the qualities mentioned in this article.

With simple filters like dividend growth, dividend payouts, earnings per share and sales growth, you can easily find strong companies with a competitive advantage.

No need to do extensive research to know if a company is coming with “the next big thing.”

No need to hope for a homerun with your next pick; most of your stocks will be singles or doubles with dividends.

No need to track your portfolio on a daily basis, dividend investing is meant for the long term.

When you think about it, dividend stocks beat the overall market in general simply because they are rewarded by investors for their sustainable business model. A model allowing them to pay dividends for years.

A Word of Caution – Not All Dividend Stocks Were Created Equal

It’s not because a company shows strong dividend metrics that it is automatically a buy. For example, Radio Shack (RSH) was showing strong dividend metrics not so long ago and everything collapsed rapidly since its business model wasn’t a great match for today’s economy.

It is important to design a strong dividend growth model approach before picking anything from your filtered list. Don’t forget there are Dividend Traps to avoid!

Source: http://seekingalpha.com/article/1505102-why-dividend-investing-will-always-be-better-than-buying-the-entire-stock-market?source=email_investing_income&ifp=0

Dividend Growth Investing And The Joy Of Doing Nothing

“You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideals come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch.”

– Quotes by Warren Buffett.

What do these quotes mean, and why am I starting an article off with them? Well, I don’t have a lot of real compelling stock ideas right now. I certainly have my eye on a number of high quality companies that I’d either love to own a part of, or increase my ownership stake in. But I feel that investors are being a bit greedy right now, so I’m consciously choosing to be a bit fearful. While I abstain from timing the market or valuing the entire market, I continue to believe in thoughtfully valuing individual companies through qualitative and quantitative analysis and only purchasing shares when they are trading for prices comfortably below their intrinsic value which confers a margin of safety. And right now I’m finding margins of safety on high quality companies to be few and far between.

As many of you know, I’m extremely bullish on equities over the long-term and I’ve invested monthly excess savings from my day job into dividend growth stocks every single month for three years save for a short period of time last summer when I took a break from blogging and investing. However, this may be one of those rare times I don’t purchase stocks during the course of a month.

What I’ve found is that dividend growth investing is wonderful for times like this, when the stock market is valued at all-time highs and us value-oriented investors are left scratching our heads for attractive opportunities in which to put new capital to work. Dividend growth investing can actually be wonderful for inactivity.

The joy of doing nothing can be powerful indeed because the wonderful companies that I’m already invested in – companies like Johnson & Johnson (JNJ), The Coca-Cola Company (KO) andPhilip Morris International Inc. (PM) – these companies are still sending me dividend payments just the same as they have for decades before. The great thing is that these dividends continue to stockpile in my brokerage account. It’s like a wealth snowball being built right in front of me, except I’m not doing any of the work. I’m not rolling any snow or trying to source a carrot nose. The companies are actually increasing my liquidity so that I can take advantage of Mr. Market’s eventual mood change. At that time I’ll be very ready to be greedy when others are fearful.

I still have a couple days to purchase shares in a high quality company before the month ends, but if I don’t I’m comforted by the knowledge that I don’t have to swing at every pitch. Maybe the pitch that Mr. Market is throwing at me right now is a wide-left ball. Maybe in two weeks I’ll have a fastball right down the middle that allows me to get on base. Who knows. What I do know is that I’m slightly empowered right now by inactivity, and I’m realizing the joy in actually doing nothing.

As I’ve said many times on this blog, a dividend growth stock portfolio that’s providing solid passive income doesn’t build itself, and so for over three years I’ve been wiring money from my checking account to my brokerage account like a giddy schoolgirl, anticipating buying stocks as soon as the wire transaction cleared. And that strategy has worked very well, allowing me to build a six-figure portfolio during that three year period.

But right now I do wonder if being fearful while others are greedy isn’t a prudent move to make. As always, I believe cash to be a horrible asset that will only guarantee losses to inflation over time. However, liquidity via excess capital can be a powerful tool indeed if Mr. Market’s historically bi-polar personality profile takes a sudden turn from manic to depressive.

In conclusion, I am currently finding some solace in doing nothing. I am not seeing many high quality companies that are trading at prices with any significant degree of a margin of safety to their intrinsic value, and so due to such I take great pleasure in continuing to receive my dividends from the wonderful companies I’m invested in. I know that these companies are building me a nice little balance sheet with growing cash. I may not have an elephant gun when the time is right like ol’ Warren, but I’ll be happy to go hunting with the pea shooter that my investments are providing me. Free bullets, anyone?

How about you? Find the joy in doing nothing, while collecting your dividends? 

Thanks for reading.

About the author:

Trying to retire by 40 by investing in dividend growth stocks and living frugally, valuing time over money.Visit Dividend Mantra’s Website

Five Benefits of Always Reinvesting Dividends

Dividend reinvestment enhances the benefits of dividend investing. Every investor should have dividend growth investing as a part of their long term strategy.

Dividends are real; they can’t be faked or created with fraudulent accounting. Long term dividends provide an important indicator of the health of the company paying the dividend.

Dividend Reinvestment

Instead of taking a dividend in cash an investor can choose to reinvest dividends and receive additional shares of stock. If you have chosen companies with strong balance sheets, rising cash flows, and strategic advantages; dividend reinvestment can provide major long term benefits.  Companies that consistently pay and raise their dividend are more likely to have competent management and a solid business plan.

Benefits of Reinvesting Dividends

Here are 5 benefits of reinvesting dividends:

1. Dollar Cost Averaging

   By reinvesting your dividends you are regularly dollar cost averaging back into your investment. When prices are low you buy more shares, and when prices are high you buy fewer shares.

2. Compound Growth

   Your dividends will continue to grow because after each dividend payout you have more shares.

3. Double Compound Growth

   If you own a stock that is consistently raising its dividend your dividends per share will be growing in addition to your number of shares growing.

4. No Commissions

   It’s an efficient way to add small amounts to your position. Even low commissions are costly when making small purchases.

5. Dividend reinvestment is easy and automatic.

   Make this your permanent option and your broker will automatically reinvest you dividends on every stock in your account.

Always Reinvest Dividends

Investors who are retired or require income can take a monthly check from cash and periodically sell positions of appreciated or overvalued stocks to replenish your cash. This strategy is simple; allows the investor to reap the benefits of re-investing dividends, and promotes the discipline of selling overvalued stocks.

Source: http://arborinvestmentplanner.com/five-benefits-of-always-reinvesting-dividends-2/

DRIP Investing – How To Actually Invest Only A Hundred Dollars Per Month

Depending on your stage in the wealth-building process, there are different things that you are likely to worry about in the execution of your investment strategy. For instance, someone that has $500,000 is probably worried about brushing up against SIPC insurance limits in a brokerage account and is probably exploring global custody options through a firm like Northern Trust so that he can be sure his assets are safe in the event of a brokerage failure. Someone just starting with only $100 or $200 to invest is probably more focused on keeping costs low, because it’s hard to get rich when you’re paying $49.95 at a full-service brokerage to invest $500 or $8.95 at a discount brokerage to invest $100.

Today’s post is aimed at those who are curious about the nuts and bolts of cheap DRIP investing. I have received many requests from readers that want to invest in individual stocks, but only have the available funds to put aside $50 to $100 into a particular company. For these investors, keeping costs to a minimum is absolutely crucial. I have often made allusions and references to DRIP Investing, but I have never offered an explanation as to how to logistically set up DRIP accounts. Today, I will attempt to do that.

The best place to begin is by clicking here to visit a link on theComputershare website. This is the big daddy of stock transfer websites. When you click on the link that I provided, you will be taken to a list of all the companies that don’t charge purchase fees (I manually applied that filter already) for investors. You will see excellent firms like Abbott Labs (ABT), Exxon Mobil (XOM), Dr. Pepper (DPS), and Lockheed Martin (LMT). Some of these firms, like Dr. Pepper, charge $15 to initiate the DRIP plan, and then all cash or electronic debit purchases are free thereafter. Some, like Exxon Mobil, do exactly what they claim: they charge nothing to set up an account, and they allow investors to make check or electronic debit purchases free of charge.

Some companies, like Johnson & Johnson (JNJ), provide a manner for you to invest for free. Johnson & Johnson charges no set-up fee, and they allow you to invest for free if you make monthly contributions by check. However, if you make a contribution by recurring debit, the cost is $1.00 per transaction.

And some companies have such a nominal fee that they are effectively free. Take Clorox (CLX) for example. The company charges $15 to setup the account. From there, all electronic purchases cost $0.03 per share to process. Because Clorox currently trades around $74, the cost is about one dollar for every $2,400 that you invest. Considering that you could pay for a lifetime’s worth of Clorox’s processing fees by checking you seat cushions for change once a year, the cost isn’t exactly placing too much of a burden on the investor.

If you click here, you will be taken to a list of every company that offers a DRIP Program. By clicking on the view section, you can see the terms that come with the purchase. Some are free, some charge $0.03, and some charge a dollar or two.

And, of course, not all companies go through Computershare. Some blue-chips administer their own plans. The most famous plan that allows investors to purchase shares for free via recurring debits is Procter & Gamble (PG). To get started investing through them, you can click here.

As is often the case, if something sounds too good to be true, it often is. DRIP Investing does come with two strings attached that I believe are worth mentioning. The first is that investors have no say in determining the purchase price of the stock. If you have a Schwab account, you can set a limit order so that the Coca-Cola (KO) stock gets purchased at exactly $36 per share. DRIP Investing does not offer this kind of flexibility. While it varies from plan to plan, a standard DRIP purchase will do something along these lines: deduct money from your account on either the 2nd or 17th of the month (you choose), and then purchase the stock at whatever price it as trading at 12:00 or 4:00 that day (again, it varies by plan). And if you pay by check, the purchasing is done at a certain time. For instance, no matter when you send in your check to purchase Johnson & Johnson stock, the company won’t buy the shares until the 7th of the month. For investors that are particular about their purchase price, this kind of thing may completely deter them from DRIP investing.

The other thing worth mentioning is that, although purchasing the stock may be free, selling the stock is not. For instance, you won’t be charged a dime for any of the Exxon shares that you buy. But if you want to sell the stock, you will be charged a minimum of a $15 fee plus $0.12 per share. If you’re not going to be holding a stock for at least a couple of years, the economics of DRIP investing usually aren’t worthwhile.

Nevertheless, these DRIP plans provide investors a compelling way to invest $50 to $100 per month free of charge (or, for those that charge $0.03 per share to process, nearly free of charge) and build positions in high-quality stocks for the long haul. The perfect investor for DRIP investing would be someone who might only have $200 to invest in Dr. Pepper here or there but has the attitude, “I don’t care whether I pay $44 or $44.50. I know I want to own Dr. Pepper stock today, next year, and the year after that.” These plans are great for allowing investors the opportunity to keep adding as much as they can to a stock free of charge, but they are much less attractive to an investor that might sell the stock quickly or cares deeply about the purchase price of the stock. But for the small investor that wants to own a company for 5+ years, these plans can be tremendously useful.

Credit: http://seekingalpha.com/article/1096471-drip-investing-how-to-actually-invest-only-a-hundred-dollars-per-month

by Tim McAleenan Jr.