Dividend investing is a passive income strategy. It’s more passive than owning rental real estate. In fact, if you choose the right company, it’s not impossible to get a 6-10% dividend increase every year. Needless to say, it’s very difficult to get that kind of pay increase every year with a job. Most employees get 2-3% increase every year, and a promotion every few years.
Here are some simple rules you must follow to be a successful dividend growth investor.
Build A Portfolio
You must own a portfolio of stocks. The stocks you own must be diversified across industries. Never own too much of one stock. Once you build a portfolio, add to it periodically to benefit from dollar-cost averaging. Reinvest dividends to grow your passive income quickly. Understand the tax implications of reinvesting dividends – you may be liable for paying taxes on the dividends paid.
Look for Businesses With Consistent Profitability
Look for companies in mature industries with consistent profitability. The company should have successfully navigated multiple business cycles, and have a sustainable competitive advantage in its market.
Strong Balance Sheet
Ensure that the company’s balance sheet is solid. The company must be able to pay dividends, manage its debt load and also invest in its business. Financially struggling companies may have highly tempting yield, stay clear of these kinds of companies.
Dividend History
Take a look at how long a company has paid dividends. I look for companies that have paid dividends for at least 10 years. More years of paying dividends, the better.
Dividend Growth History
I look for companies that have increased dividends for at least 10 straight years. These companies are sometimes called Dividend Contenders. Companies that have increased dividends for 25 straight years are called Dividend Aristocrats.
Investing in Dividend Contenders and Dividend Aristocrats ensures that you are likely to keep getting increased distributions. Though no one can predict the future, a long history of increasing distributions shows that the management is willing to share the wealth with its shareholders.
Payout Ratio
This is the percentage of the earnings that the company pays out as dividends. A low payout ratio means that the company has room to raise dividends in the future. On the other hand, if the payout ratio is closer to 100%, it means that the company cannot afford to increase dividends in the future.
Perseverance And Compounding
There are times when growth stocks (which don’t pay dividends) outperform dividend-paying stocks. In these times, you need to stay patient and continue with your strategy of investing in dividend growth stocks. It’s only a matter of time before dividend stocks come back in favor.
Persisting with the dividend growth strategy, and reinvesting the dividends will allow the power of compounding to work in your favor.
Own Growth Stocks In Addition to Dividend Stocks
There are plenty of stocks on the stock market that do not pay dividends. But they are excellent companies as well. Do you research but own those stocks as well, and not limit yourself to just dividend-paying stocks.
Bottom Line
Dividend growth strategy will let you build a passive income stream that you can live off of one day. The initial income may be small and insignificant, but give it time, and it will grow and give you income and peace of mind that you cannot get with any other passive income stream.