This article originally appeared on The Div-Net on December 29, 2011
What better goal to have for 2012 than to start a diversified portfolio of dividend growth stocks that will reward you for being a loyal shareholder by distributing quarterly, semi-annual or annual dividends? Building a sustainable passive income stream by investing in quality businesses that have an economic moat, a lengthy history of rising earnings and dividends, solid balance sheets and are trading at attractive valuations allows you to take that income and reinvest it back into dividend growth stocks or use that income stream for other ventures. It is important to remember that not only do you receive a portion of earnings in the form of dividends from these companies, but these companies also re-invest earnings back into the company to continue to grow the business. This will lead to higher earnings, and therefore a higher share price which leads to an increase in the market value of your investment.
The best way to start building a dividend growth portfolio is to start with a little capital. I personally started with about $7,000 when I initially started building my Freedom Fund. After tinkering with mutual funds and miscellaneous stocks for a couple months, I found the dividend growth investing startegy and decided after much research to focus my capital and time in this investment strategy. It doesn’t take much capital to start, and one can start with as little as $1,000. If finding $1,000 to invest proves to be cumbersome, then I would first recommend you start budgeting, cut out unnecessary expenses and start saving money.
Now You’re Rolling
Once you have a little capital set aside for investing, it’s just a matter of opening a brokerage account and start researching individual stocks to invest in. When initially building a portfolio from the ground up, I would stick with a few large-cap blue chip dividend growth stocks to build my portfolio around. These would be your core positions. Stocks like Procter & Gamble (PG), Coca-Cola (KO) and Johnson & Johnson (JNJ) would fit the bill here. These companies typically are consumer based, are not cyclical and produce products that have demand in all economic cycles. Once you have your core built up, you can start to expand your portfolio around this core and invest in other solid companies that also have economic moats, sustainable and growing earnings/dividends, produce quality products, have solid balance sheets and trading at attractive prices. I ty to keep a watch list of 50 or so quality dividend stocks, which includes the companies I’m currently invested in. Stocks like Medtronic (MDT), Emerson Electric (EMR) and Illinois Tool Works (ITW) are all companies I’ve invested in and am willing to invest further funds based on valuation and my allocation at the time of investment. Companies like Becton, Dickinson (BDT) and Kimberly-Clark (KMB) are examples of stocks that I have not invested in yet, but are on my list to invest with at a future date depending on valuations and changes in the individual companies and the market as whole.
The key to starting your new year off right and building a dividend growth portfolio is to commit to a plan, do your due diligence and be ready to make changes as market conditions change. My plan involves committing at least 50% of my net income monthly to dividend growth stocks and investing in 1-2 quality companies per month. I roll with the punches and sometimes make mistakes. I recently sold my entire position with Telefonica S.A. (TEF) (ADR) and reinvested that capital into other attractive opportunities. The key is staying humble, doing your research, sticking to your plan and realizing that building a solid dividend growth stock portfolio takes time and is a get rich slow plan. If you invest in quality companies at attractive valuations and plan to hold for the long-term while remembering to continuously monitor your portfolio you will build wealth, and with it a passive income stream that could afford you financial independence and freedom to pursue your dreams. When you no longer have to exchange your time for a paycheck, you will effectively be buying yourself time to chase whatever goals and desires you have in your life.
Best wishes for a prosperous 2012!
Full Disclosure: I’m long KO, JNJ, PG, MDT, EMR, ITW
Thanks for reading.
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