Start Off Your New Year Right

This article originally appeared on The Div-Net on December 29, 2011

Get Started!

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.

Fund Your Dreams

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.

Stay Focused

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.

Photo Credit: arztsamui

Comments

  1. Mike says

    DM – thanks for the encouragement. I’m mid-40s and have been fumbling around with mutual funds for…well, for far too long. Several weeks ago I decided to get serious about saving for my family’s future. I came across your blog and your strategy made sense. I dove in, spent a lot of time over the holidays doing research, and on 30 December sold off all my mutual funds in my Roth IRA and opened positions in CVX, BIP, PM and MCD. Nothing fancy, I know, but for the first time it felt like I was taking control of my financial future. A lot more research to do this year, but am very excited to have taken first step.

  2. MySavingStyle says

    DM- One of my goals this year is to save half my net income for stocks. Your blog inspires me. Keep up the great work!

    Mike- I bought MCD in 2010 and have held on, it’s been by far my highest gainer. Only wish I would’ve been able to put more in. Now since I got it at such a bargain, I can’t bring myself to purchase any more.

  3. says

    I’ve been reading a number of Dividend Growth blogs lately, and I’ve seen a lot of comments about the following two topics:

    1. Investing for dividends should be done in a tax-deferred or tax-free account.
    2. Dividend growth stocks may be the next “bubble” to pop in the near term.

    Any thoughts on either of these topics?

  4. says

    Hi DM,

    Great advice for the new year. I wanted to let you know that I have started my own dividend-growth investing blog, partly inspired by yours. It is now up and running at:

    http://deedubsdgi.blogspot.com/

    I’m looking forward to working on it and continuing to read yours. There definitely appears to be a group of young investors around (~30 years old) who are interested in dividend-growth investing, and I’m hoping that blogs will provide useful and informative exchanges of ideas and experiences.

    Best wishes in 2012 and beyond!

  5. says

    Mike,

    Great news. No matter what, for better or worse…if you’re in control of your future, then at least you can look back and say you did it your way. Plus, you can also do it without paying a money manager. I’m glad to see you’re getting informed and taking control!

    Best wishes!

  6. says

    MySavingStyle,

    Thanks for the support. It means a lot that I inspire others as I’m just a regular guy out in the world doing my best to make my future bright. I hope to be at a 60%+ savings rate this year. I’ll do my best.

    Keep up the great work on your end too. Best of luck with the savings and investing.

    Take care!

  7. says

    at executioner:

    as dividends being a bubble, i would say absolutly not. if you look at the list of ‘dividend aristorcrats’ you will find that people have been ‘touch’ there products for over a century at times and will continue to do so.

    as for stocks being in tax-deferred that would probably not be the case depending on your situation. here is a link that shows how to invest in a tax efficient manner. good starting point.

    http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement.

    at DM:

    continue to like your blog and read it often. This year we have decided to stay put for the most part w/ our portfolio of 10 stocks (9 of which are dividend stocks). We did some TLH, consolidating, pearing down of sort in Dec.

    Portfolio stands as:

    ADP, KO, GE, GIS, KFT, MCD, PEP, PM, & PG. AMZN (the non-dividend outlier) b/c everyone shops either at walmart or amazon. When we bought it it was trading at a 52 wk low. We decided to only add shares quarterly or so to PEP and KO, figure having a ‘monopoly’ of sorts doesn’t hurt.

    salud and continued success.

  8. says

    TheExecutioner,

    Thanks for stopping by.

    1. I invest in a taxable account because I plan on living off my dividends at a relatively young age. If it weren’t for that fact I would probably max out tax deferred accounts and invest in taxable accounts with what was left.

    2. I have no idea if that’s true or not. To be honest, I don’t try to predict such things and don’t really agree that we are in any kind of “bubble”. If the “bubble pops” then that just presents me, as a value investor, better value on my dollar and more shares for my capital. I would simply buy more.

    I would, however, agree that the market is expensive now and that there are fewer values to be had than just a few months ago, and because of that I’m hoping for a correction in the short-term. I’m a long-term investor so I don’t really pay attention to the peaks and valleys of the market. I buy the most attractive businesses I can find, monitor my investments and plan on holding for the long-term.

    Best wishes!

  9. says

    deedubs,

    Wow man, great to see that. I’m really happy to inspire others. It means a lot to me. I wish you nothing but the best with your new blog.

    There definitely appears to be a group of investors in our age range interested in, and following, the dividend growth strategy. Although some people would say it runs counter intuitive, as young people can take more “risk”, I would argue the complete opposite as being young gives you plenty of time to let the compounding machine really get up and running as one of the prime ingredients for a successful DG strategy is time.

    Great to see the blog. I’ve already stopped by and said hello.

    Best wishes.

  10. says

    lazyfabs,

    Thanks for stopping by. I appreciate your support and encouragement. Seems like a nice portfolio there and we share a few positions.

    I wouldn’t mind ADP and GIS in my portfolio, but last I looked they were a little pricey. GE is one I passed up even when it was very cheap due to the debt load and what seems like a general distaste for management.

    Best wishes!

  11. says

    Hi DM,

    I feel the same way as you regarding the notion that young people can take more risk in the market. Sure, one could have some large gains, but one could just as easily have some large losses. The argument is that young people have more time to absorb large losses, but I say why risk large losses in the first place?

    As you point out, young people have time on their sides and can achieve greater effects of compounding by investing early in dividend-growth stocks. For example, I have done calculations of projected annual dividend income going out 25, 30, and 35 years based on some reasonable assumptions. Once you get out that far, it is amazing how much of a difference just a few more years of compounding makes.

    Regarding the possibility of a dividend-growth bubble, I agree that many dividend-growth stocks are a bit expensive at the moment, but it is not extreme enough to be characterized as a bubble. However, as you mention, if there is a bubble and it pops, then it merely provides an opportunity to buy quality stocks at lower prices. Moreover, regardless of how the market is pricing the stocks, the underlying companies are still paying and growing their dividends, which is what matters the most to me.

  12. Anonymous says

    DM,

    Things happen in life, so I don’t know about the practicality of retiring early. On the other hand, the contingencies in life make paying off your debt and developing an alternate income stream very important for maintaining your freedom of action.

    In the current environment, corporate dividend stocks are the best alternate income stream. If it gets to the point where corporate dividend stocks are overpriced, I will look at other income streams such as bonds.

    Ken

  13. John W says

    Hey Dividend Mantra, I love the articles and your retirement goal.

    I was wondering what your stock watchlist looks like. What measures do you watch and find the most helpful?

  14. says

    Executioner,

    I’m in the camp that doesn’t really pay that much attention to where to put investments in various taxable or tax deferred accounts. If you want to have a powerful and flexible personal balance sheet to help you in any kind of financial situation, you will want to investments in all types of accounts. Since I believe that dividend investing is the best way to go, this means I don’t segregate.

    Save and invest a lot. Don’t worry too much about taxes.

    One point though where you might want to adjust this is with ROTH accounts.
    This is the only ‘free lunch’ you get, ROTH IRA or a ROTH 401K. In these accounts you never pay taxes, when used correctly, even if you want to pull contributions out before retirement.

    sfi

  15. says

    deedubs,

    Great points! I don’t like to take on too much risk, because if I lose $1,000 then that still a grand I have to make back at work. Even though I’m young and I have time to “make it back”, it’s still a loss and it’s still a lot of money. I’d rather take my time to ensure a compounding strategy works.

    I agree, although a lot of blue chip dividend payers are expensive I’m not quite sure it qualifies as a “bubble”. If PG and KO start yielding 1% with P/E ratios of 30 then I’ll say we’re in a bubble. I will say that I get a little sick every time I hear Cramer and other talking heads start yacking about dividend stocks. Hopefully things start calming down and we get some great opportunities.

    Best wishes!

  16. says

    Ken,

    I agree that things happen in life. Which is exactly why I’d like to retire so early in life. There is no guarantee of tomorrow, so I do want to maximize today. I work to live, I do not live to work.

    Bonds are very unattractive to me right now, but as interest rates rise, which is inevitable, and if dividend stocks start to become overvalued as a group then perhaps bonds will be more attractive at that point. I still see that as being a few years off, which is why I continue to concentrate on quality equities with both hands.

    Best wishes!

  17. says

    John W,

    Thanks for stopping by. I appreciate the compliments!

    I should probably publish my watch list someday, as I keep it active on my brokerage account. I look at valuations (P/E, P/S, P/B, historical price and yield, price vs. sector), yield, dividend growth history (at least 5 years in general), dividend growth rates, attractive balance sheets (low debt/equity, good interest coverage ratio), quality products that people want/need and pay a premium for, economic moats, brand names, economies of scale, distribution networks, monopolies, etc.

    Some companies on my watch list that I do not yet own include: BDX, V, RTN, WM, LMT, NVS, GPC, UTX, HAS, OMI, CL, WAG, CVS, MSFT, GIS and others.

    I hope this helps!

  18. says

    @sfi,

    I agree w/ your point of sav and invest a lot. One should maximize every avenue one can w/ in the limits of available money of course when it comes to investing.

    But it is also very important to make sure that any money invested, made be either by growth or dividends paid, especially in taxable accounts, it doesn’t end up in the IRS’s bank account.

    Tax planning is just as important as investment planning.

    And remember that money that goes into a Roth IRA is taxed before it goes in. No such thing as a ‘free lunch’ when it comes to the IRS.

  19. says

    lazyfabs,

    I think it’s also important to note that I plan on living on very little money and retiring early. I’ll be receiving less than $20k in dividends when I retire, so I’ll be paying very little in taxes based on our current tax structure. I agree in being proactive, tax-wise, but if you’re working until you’re 60 you’ll be paying A LOT more taxes than I ever will on an absolute basis, anyway. I plan on limiting how much money goes into the IRS’ bank account by spending little, earning little and not working until my back gives out.

    Best wishes!

  20. says

    Hey Mantra,

    Just to let those know who are just starting out, they don’t need thousands of dollars to start off :) After all for people just getting their feet wet, 7K is a lot of dough.

    For those who are really just starting out, DRIPs (Dividend Reinvestment Plans) offer those investors a great way to get started. They can buy as little as one share in a company…

    For sure we would both agree, avoid mutual funds like the plague! ;)

    Cheers
    The Dividend Ninja

    • says

      Ninja,

      Hey, thanks for stopping by! Always glad to hear from you.

      I agree 100%. One doesn’t need a lot of capital to start out with, that’s why later in that paragraph I state such. However, if one is having a hard time coming up with a small amount of capital to invest, then one is probably having other financial issues (lack of budgeting, overextended on credit, lack of income) that need to be resolved first.

      And, definitely…avoid mutual funds like the plague! Couldn’t have said it any better myself.

      Best wishes!

Join The Discussion!