Let's get this series kicked off with a bang and introduce a style of investing that is currently gaining popularity among the blog scene. The style we will dig into today is Dividend Growth Investing.
Dividend growth investing can be summed up with these bullet points:
- Invest only in stocks with a history of increasing their dividend.
- Try to find the most undervalued
- Make sure that you have DRIP set up so that you can compound your dividends over the long haul.
This leaves you with a fairly simple game-plan when you begin investing. Most of the time stocks that have a long history of dividend growth are stable and have little volatility. This is a good thing for those that don't know a heck of a lot but want to invest in individual companies. That being said, there is a way to be better than others at this investing as it is not just a plug and play method.
There are a few different categories that you need to know about when you are beginning your trek as a dividend growth investing.
- Dividend Kings - 50+ consecutive years of dividend increases (S&P 500)
- Dividend Aristocrats - 25+ consecutive years of dividend increases (S&P 500)
- Dividend Champions - 25+ consecutive years of dividend increases (all)
- Dividend Contenders - 10-24 consecutive years of dividend increases (all)
There are also a few other lists such as achievers, producers, etc. but if you are new to this type of investing I would read through these first.
Another thing that you will really need to read up on is DRIP (Dividend Reinvestment Plans) and how this will be a tool for you to use as you continually put money into your portfolio. DRIP is basically a program that automatically reinvests the money you make from your dividends into fractional (or whole) shares of the same stock. This bypasses commissions/fees and taxes while increasing your dividends. There are pros and cons to this but if you are getting into dividend growth investing then you need a broker that allows this. Investopedia has a nice little article that explains DRIP and you can find it here.
There are some major pros that come along with this type of investing and for me it lays out like this:
- Great for Beginners
Now take that beginners lightly, as I am not saying if you don't know what a share is this is for you. What I mean is that if you are looking to begin investing in individual companies instead of ETF's or bonds then this is a great place to start. Low volatility (for the most part), companies with solid histories, and dividends means that while you may not be making 30% a year, you also won't be losing 50%!
- Passive Income Rules
When it comes to gaining income that you don't have to work for this is one of the best options you have. When you invest in dividend growers that means that if all goes right then you will increase not only the dividend of each share but the amount of shares you have as well because of DRIP. This leads to more cash every year!
What does this passive income potential look like? Here is an example if you start with $1000 in a company that has a $50 share price, grows at 6% (not crazy), grows the dividend at 6% (also not crazy), and you use DRIP at each payment as you hold for 20 years. If you want to use the calculator I did for this you can find it here.
As you can see the passive income is no joke. This is truly a sit and wait technique that can be used year after year as you keep getting paid.
- Value can be hard to find
In terms of find an undervalued Dividend King, it can be very hard to do in some markets. Due to the reliability in the companies you may find that finding a King or Aristocrat under a 20 P/E may be tough.
- Dividend Yield will be Lower
Because these companies usually have lower payout ratio and a higher price tag it means that you may be getting into them at a lower yield than other portfolios. You won't find a 5% yielder here as you will be closer to the 2-3%.
- Income over Performance
Due to the nature of this investing it is better suited for those that want to just see that passive dividend income grow instead of the percentage of yearly gain of the total portfolio. History has shown that over the long run you will win with most of the growers, in term of portfolio gain, but the increases may be smaller year to year than the portfolios of investors that are more active.
There are a ton of great resources when it comes to dividend growth investing and I would say that the best place to start is with a blog called the Dividend Diplomats. These guys specialize in this type of investing and are as down-to-earth as it comes in terms of the way that they write. They also offer some great advice on how to earn some extra income, what foundation stocks they recommend, and are open about their holdings. Again, this is a great place to start.
Another great blog that I frequent is Dividend Growth Investor. If you can't tell by the name, he obviously specializes in this type of investing as well. The thing that I like most about this blog is the constant posts that he pumps out that are very educational about the subject. From attractive stocks to watch to recent dividend raises it is full of great information.
For more blogs about dividend investing head to the Dividend Diplomats blogroll page.
In terms of resources that are not blogs there are a few that I recommend:
A great place to look at a company's background weighed solely off their dividend history.
- Dividend Value Builder Stock Lists
This is a great site run by Ken Faulkenberry, who has a ton of great content and advice. My favorite part though is this cheat sheet that gives you all of the dividend growers as they are categorized by years of consecutive growth.
- A Broker with DRIP.
I will leave these to you all to figure out on your own, but make sure that the broker uses DRIP, with fractional shares turned on, and check out all of the fees.
Again, this is just the tip of the iceberg when it comes to growth investing but it should give you a decent little look at it. I believe that this is a great way to invest if you want to be more passive and are worried about creating continual income over a long period of time.
As always let me know what you think below!