Why I Love Dividend Growth Investing

Dividend growth investing is an investment strategy whereby an investor primarily focuses on stocks that pay dividends, and have a history of raising those dividends on a consistent basis. Taking this a step further, most dividend growth investors then hone in on businesses that have stable operations, responsible uses of debt with low debt ratios, economies of scale and manufacture and/or sell products or services that people/other businesses want or need on an everyday basis. Typically, a dividend growth investor wants to covert their capital into equity shares with a group of high quality businesses that share profits with shareholders in the form of dividends, thus creating a portfolio of businesses that they are a part owner of.

I consider myself a staunch proponent of this strategy. You can view my portfolio at any time, and you’ll see it’s mostly filled with high quality businesses that have stable businesses that largely have economic advantages of some type, be it brand names, manufacturing capacity/efficiency, technological advantages, patents, global operations and the like. Some of my largest individual investments are with companies like Phillip Morris International Inc. (PM), Johnson & Johnson (JNJ) and PepsiCo, Inc. (PEP). I have most of my net worth invested in high quality companies that pay out (rising) dividends, and so I thought I would share today why I’m such a fan of this strategy.

It should be noted before I go any further that dividend growth investing is just but one strategy an investor can use, and common stocks are just but one asset class. Although I’m primarily invested in stocks, I do plan to diversify my wealth when interest rates make it prudent to do so. I highly recommend diversifying your individual stock holdings (I’m currently invested in 32 individual companies) and taking that further I strongly recommend diversifying beyond stocks into other asset classes as you feel comfortable. Real estate, bonds, commodities/precious metals and cash (CD’s, money market accounts) are the most common asset classes used. I plan to have a portion of my net worth in real estate (either physical ownership or more likely REIT ownership) and bonds by the time I’m financially independent and actually living off the passive income my investments provide.

So, on to some of the wonderful reasons I love dividend growth investing:

1. Stock market volatility mainly provides opportunity, rather than wealth destruction.

For investors that buy an asset with the hopes that they can sell it later for a higher price, market volatility can affect one’s emotions quite heavily. This is one of many reasons I don’t invest in gold. Buying an asset and then hoping that you’re buying it cheap enough that you can sell it later for an amount high enough to factor in transaction costs, taxes, inflation and still come away with a risk-adjusted return that is acceptable is just plain risky and factors in too many unknowns. It also heavily factors in an external market and all the market participants therein, along with all of their emotions. These emotions are what causes wealth destruction. If you buy a stock for $35 because you want to sell it down the road for $40 or more and the stock starts trending down to $30 it’s easy to panic, because the rift between what you want to sell it for and what it’s currently selling for enlarges. Panic occurs and often an investor looks to get out while they still can. Lack of control over one’s emotions is one reason why most investors are probably better off investing in index funds.

Rather, I mostly isolate myself from the stock market’s often irrational sways ups and downs by investing in dividend growth stocks. Often, the market’s sways are only used for opportunity as I look to buy shares in high quality companies at a value relative to their intrinsic value. If I value a stock by qualitative and quantitative analysis to be worth $50, then I simply look for opportunities when the market is pricing these shares under that price, and the further below that number the better. The lower price means I’m factoring in a margin of safety from errors in my analysis, future fundamental issues with the company I’m investing in and also means that I’m effectively buying more yield for my money as cheaper share prices means I can buy more shares with the same amount of money, and more shares means more dividends.

How did this relative isolation occur? It’s because I focus on the growing dividends my equity ownership stakes pay me. The underlying share prices mean little to me other than to offer me an opportunity to average down on my purchases. I don’t plan to sell any of my shares to fund my early retirement, so the share prices actually mean very little to me. As long as the companies I’m invested in do not cut dividends or radically alter their business model or fundamentals I’m happy to continue collecting dividends, which I currently reinvest selectively but will later use to pay all my expenses. This means I have little worry over the broad market’s emotional reactions to quarterly results, irrationality over major global events that have little to do with the companies I’m invested in and such.

2. It forces me to focus on high quality, proven companies.

Realistically, it’s very difficult for a company to pay out dividends for decades on end, all while raising them on an annual basis along the way. There’s a lot to go wrong. There are natural disasters, economic cycles, changes in consumer tastes or habits, government regulation, taxes, product recalls, competition, patent expirations and costly infrastructure maintenance among many other things that can hamper a company’s ability to pay out, let alone raise, a dividend for 10, 20 or 50 years. Only the best companies with consistently great management, fantastic products, prudent use of capital and leverage and a focus on shareholder return manage lengthy dividend streaks. These are typically very, very high quality companies that stay high quality for very long periods of time. The Coca-Cola Company (KO) has been paying dividends since 1893! That time frame includes two world wars, The Great Depression, Black Monday, Black Tuesday, the end of the gold standard and multiple natural disasters here and abroad. High quality companies overcome setbacks and continue to create value for shareholders over the long-term. High quality companies that continue to pay out, and raise, dividends over very long periods of time have to make prudent use of cash as it’s actual cash that’s leaving the company and going into the pockets of shareholders. Dividends effectively makes sure that management is doing the right thing, and the cash you receive is “proof in the pudding”, because that cash didn’t get there from some accounting trick.

Or…I could instead just invest in whatever stock is “hot” at the moment and ignore high quality, proven companies. I could invest in Netflix, Inc. (NFLX) or Facebook Inc. (FB) and hope that they are able to survive major economic changes while increasing the price of my shares, since I have no dividends being paid to me. They don’t really have any lengthy history to speak of, but they’re hot. So, that must count for something. And, they’re relatively cheap. FB currently has a P/E ratio of 1,742. NFLX currently trades for a P/E ratio of 563. Hmm. Why buy into a high quality company like KO, whose shares currently force an investor to pay 22 times earnings when you could just as easily pay almost 1,800 times earnings for an unproven company like FB? Oh, and the former pays you to own it, while the latter pays you zip nada.

3. Typically the dividend growth of high quality dividend growth stocks outpaces inflation, thereby increasing my purchasing power over time.

Not only do the dividends that dividend growth stocks pay out rise over time, they typically do so at a rate that outpaces inflation. According to this source, the inflation rate over the last 10 years has averaged under 4% annually, with a few individual years being far under that number. Many of the companies I’m invested in raise their dividend at a rate that outpaces that number by a large margin. For instance, just recently The Procter & Gamble Company (PG) raised the dividend by 7%, this coming after 56 prior years of dividend increases. High quality, indeed. As these dividend raises continue to increase at rates above inflation, my purchasing power only increases over time as my dividend income will be able to purchase more and more.

Compare this to bonds, for instance, that pay a fixed interest rate to the bondholder. Investing in a 10-year Treasury Note gets you a fixed 1.70% interest rate right now. That means you’re likely to receive a negative total return over that 10 years if you were to hold to maturity, because 1.70% is near or under inflation as it stands, and that’s before factoring in taxes. Also, that 10-year Note will return your capital back to you as it began, meanwhile the equity issues of high quality companies will likely advance over time as the underlying business becomes more and more valuable. Compare that 10-year Note to the 2.95% yield PG shares currently offer, along with the growth of that yield and the growth of the underlying share prices over the long-term and the choice is obvious.

4. Dividend income is truly passive.

One great thing about dividends is that they are completely passive. People throw around the term passive quite a bit, all the while not actually using it in the correct context. Many people dream of a passive income source that will fund their lifestyle as they see fit, without having to work a 9-5 till’ 65 to pay the bills. Passive income means you earn an income with very little or no effort on your part. But, I see passive income being associated with blogging, owning your own business, vending machines and real estate. These are all valid sources for an income of varying degrees, but are they truly passive?

Blogging is definitely not passive, as I typically spend well over 10 hours per week running Dividend Mantra writing new articles and administering the site. Owning your own business is likely not passive at all, as most small businesses require the owner to spend great deals of time to run them, even while 3/4 of start-ups fail. Real estate is very commonly used as a source for passive income, and could come pretty close to completely passive if you use a management company to run your rental properties. However, management companies take a slice of your profits, and still will likely contact you about major decisions like replacing appliances or evictions and the like. Coca-Cola (KO) will never contact me as a shareholder because an assembly line had a minor issue or because one of their thousands of employees had some kind of personal issue. They’ll just continue to do business as normal and send me my dividends like clockwork. Dividend income is truly passive, and even better it’s an income that is completely location independent. You could even retire abroad, or travel indefinitely if your dividend income was sufficient enough. Dividends are also passive in the sense that they remove you from having to sell shares to receive the income. No action on your part is necessary to receive the money once you’re invested in a company that pays out cash dividends.

5. Dividends are reliable and regular, just like bills.

One of the great things about dividends is that you have a pretty good idea of how much you’re going to receive, and when you’re going to get it. For example, Johnson & Johnson (JNJ) has been paying dividends in March, June, September and December (usually around the 13th of each month) for as long as I can go back. And you know that JNJ is going to send out their $0.61 quarterly dividend as they usually do, only until they raise it (likely to be announced in the next week or so). The regularity of dividends, and raises, is quite attractive as we all exist in the real world where bills are due on a similarly regular schedule. If you’re using your dividends to pay all your expenditures, it’s quite nice that most high quality businesses pay their shareholders a portion of the profits on a regular and fairly reliable schedule. Contrast that to the earlier used example of real estate, and you can see how irregular things can become with the occasional eviction and the intermittent replacement or repair of something on the property. As a real estate investor you’ll likely have a reserve fund for issues like these, but that’s money that could be used to earn a return on instead of being used to cushion occasional cash flow issues.

Conclusion

These are just some of the reasons I love dividend growth investing as a viable strategy to not only build solid long-term total returns, but to actually receive a truly passive income source that can fund an early retirement. While there are drawbacks to this strategy (time spent to analyze companies for initial purchase, knowledge/interest required, exposure to a volatile stock market, no guarantee of return), there is no free lunch in life and nothing is perfect. Weighing the benefits against the drawbacks, however, I feel this is a fantastic strategy for generating passive income while investing in high quality assets.

How about you? Love dividend growth investing? 

Full Disclosure: Long PM, JNJ, PEP, KO, PG

Thanks for reading.

Photo Credit: jscreatinonzs/FreeDigitalPhotos.net

Comments

  1. says

    Dividend growth investing fits very well with my personality. I like the focus on quantitative and patient buying and holding. I also like how it narrows the thousands of available stocks to a few hundred.

    On the downside, it’s not very sexy. “I just bought KO” doesn’t really make for great banter the FB, GOOG, and AAPL do.

    • says

      MFIJ,

      Great point there. The focus on a small universe of stocks of a few hundred or so that’s easy to digest (out of the thousands out there) makes DGI very attractive in that regard.

      DGI definitely isn’t sexy, at least not in the beginning. I remember people I was talking too (family and friends) about my $50 dividend months being less than impressed. But, telling them I’m on the cusp of $500 dividend income months all of the sudden perks the interest up quite a bit.

      Best wishes!

    • says

      I used to have 20K months in my consulting business and had no one to speak with. Then I had a wife who used to ask what was up with our finances, I would tell her, and then she would complain I never told her what was up with our finances. And then I started learning about investing. I started having those $50 months and whereas it really impressed me because I knew how much effort I always put into making cash and dividends are just so cool (read yelling screaming freaking out cool so people think I am insane and try to lock me up cool!). So then I noticed a lot of folk just having tremendous money troubles, especially in the last few years, but they do not want to hear or benefit from any of my experiences (getting out of debt, saving an emergency fund, building an investment account, such incredibly boring stuff!). So I began wondering if most people simply do not hear this stuff…of course I have wondered a lot more and speak with a lot less people these days.

      update: I actually believe I could be having $3K or $5K months and people would still not hear it for the most part.

  2. says

    Good post DM. I’d like to emphasize the fact that real estate rental properties may not be exactly passive either. Even if you have a manager managing them you still may be required to be involved in certain decisions and make possible repairs if need be depending on your skillset and available cash.

    Cheers~

    • says

      Investing Early,

      Thanks for stopping by!

      I was actually trying to make a point about real estate not being passive. That’s why I mentioned how real estate is not as passive as people make it out to be because even if your property is run by a management company (which cuts into your profit), they’ll still contact you about certain decisions. And, I would also agree that landlording is more profitable if you’re a handy DIY type.

      Best regards!

  3. says

    I’ve never really heard of dividend investing until recently, but it seems very interesting. I understand and agree with all of your points. One question I have is, why is this strategy better than investing in index funds with long track records of getting between 10-12%? Is it the stability that makes the 3-4% that much more intriguing? I’m just trying to understand it a bit more.

    • Larry says

      I can’t name one index fund that’s gone up 10-12% for over 10 years much less 3-4%. I can name a ton of dividend stocks they pay over 3% in dividends a year.

    • says

      Jake Erickson,

      Well, the stability of the ’3-4%’ in the dividend is just one component of total return. Appreciation of the underlying shares is also part of that total return (capital gains + dividends). I’m focusing on dividends here because I don’t plan on selling my shares on a regular basis, unless forced to due to unfavorable dividend policy changes or fundamental issues with certain companies.

      So, if you invest in JNJ at ~$85 today you’ll get your 2.88% yield based on the dividend, but it’s likely that JNJ shares will not stay at $85 forever (in fact I can almost guarantee it). EPS will rise and assuming a static P/E ratio, the shares will rise in kind. Those capital gains will be a part of your total return. That’s where index funds get their gains from as well. They simply take a little off the top as part of the management fees.

      Hope that helps!

      Take care.

    • Onassis says

      Why can a company rise the EPS every year?
      I know, when the EPS go up, the shares will rise to.

      The question is: Where is the end of the journey for JNJ?
      Where is the end of the journey from PG, with a Market Cap round about 222,000,000,000 USD :-0
      Big and very huge companies – is the world big enough for growth for the next 20-50 years?

      Onassis

    • Anonymous says

      “is the world big enough for growth for the next 20-50 years?”

      Maybe I am to optimistic but I think there is plenty of room for growth over that time frame. Just think of all of the people in the world that do not use P&G products.

    • Onassis says

      Oh yes – I love Gilette so much!

      Africa, China, everybody have to shave with shavers from Procter & Gamble.
      And they have to use shaving cream from Colgate-Palmolive! :-)

      Nice Thoughts!
      That reassures me a little bit :-)

      Thanks and best wishes!

      Onassis

    • says

      Onassis,

      EPS growth is based on more than just top line growth. Share repurchases also fund EPS growth because if shares are being retired and the float is being reduced, there are less shares to spread profit between and so EPS as a whole goes up. Of course, this is not indefinite…but it is a source of profit per share growth during times of slow core growth.

      And I do believe that there is still plenty of growth ahead for global juggernauts like JNJ and PG and the like. There are billions of people out there striving to rise up to a middle class and use these products, and billions more yet to be born. Growth is there.

      Best wishes!

  4. says

    You have a very solid approach. Diversification across stocks with solid dividend growth is an excellent long term strategy. Your portfolio will survive the dips and provide steady dependable growth.

    The only thing I’d say is that while dividend payouts are passive, we do need to do a bit of research from time to time to make sure our money is invested in companies that will continue to grow income and dividends. We don’t know for sure that Coca-Cola will still be growing 5 or 10 years from now.

    • says

      Dividend Ladder,

      I definitely agree with you. I mention the time needed as part of research at the end of the article as one of the drawbacks of the DGI strategy. It’s not perfect, to be sure. I would say that if the research and analytical side of this investment strategy is something that you leaves you in distress then you’re probably off seeking a much more passive investment strategy like index investing. I happen to find a lot of enjoyment in reading about business and the way companies work. Looking at financial statements is interesting to me. So this strategy fits me well.

      Best regards!

  5. Onassis says

    Dear Jason,

    again a long and very good post!
    Congratulations! :-)

    I know that Peter Lynch prefers always shares. NEVER bonds!
    And I think he is right!

    My own diversification is:
    First: own house – debt free from May 2013 ;-) Yeahh!!
    No matter what happens – I have a roof over my head. I don´t have to pay rent. And if I loose my job – OK, but I don´t ha be to pay rent! ;-)

    Second: Shares – better: shares after the Dividend Growth Investing principle.

    I think volatility is very good. Than you have the chance, to buy the stock cheap. More shares for the same money. More dividende for the same Money!

    One last question:
    I don´t understand the difference between Philip Morris (PM) and Altria (MO).
    Altria was earlier Philip Morris?
    Why is PM better than MO?

    And here is funny song about Ben Bernanke: http://www.youtube.com/watch?v=3u2qRXb4xCU ;-)

    Best regards :-)

    Onassis

    • says

      PM is pretty much the international arm of MO. They spun off PM and it is purely an international play. The domestic MO is under much more pressure from regulation from the US government and the overall declining tobacco market. PM isn’t exposed to the strict regulation by the US and the international tobacco market is still growing. Especially in China.

    • says

      Onassis,

      Thanks for the kind words! Always very much appreciated.

      Congrats to you on owning your own home free and clear. That’s simply fantastic! Really great. Keep up the good work!

      I hear you on stocks. I read somewhere that Peter Lynch never met a stock he didn’t like, or something of that nature. I remember the Magellan Fund he ran had hundreds and hundreds of stocks at one point. I’m not a fan of bonds at all right now, but when interest rates rise (which they will) and owning bonds makes sense I’ll likely make that part of my strategy.

      Pursuit answered your question succinctly on the PM vs. MO question. MO is domestic (U.S. only) and PM is international (everywhere but U.S.).

      Best wishes!

    • Onassis says

      Dear PIP and DM,

      thank you very much for your answers!
      Now I understand the difference!

      Thank`s a lot! :-)

      Onassis

  6. says

    Well played, sir. A lot of people buy “value” in the market, but this approach focuses you on the UNDERLYING value of the corporation, not just a simple p/e ratio, etc. You make things very clear and I think you’re going to help a lot of people with this.

    • says

      Pretired Nick,

      Thanks so much! I certainly hope it helped some out there. Sometimes I can get carried away with the details. I need to write a “DGI for beginners” post sometime. Some of this stuff can be overwhelming to some, I’m sure.

      Thanks for the support!

      Best regards.

  7. says

    I love me some dividend paying companies. It forces you to focus on the value of the company to ensure that you get a good price. Plus the fact that my money can work 24/7/365 while I can do whatever else I’d rather do is great. I can’t remember the last time if ever that I received a 7-12% raise from my employer either.

    • says

      Pursuit,

      I love me some dividend paying companies too! I’m with you on that one. :)

      Money can work harder than I ever could. Working 24/7 and not calling in sick is wonderful. :)

      And, yeah getting 6-10% raises every single year is highly unlikely at your job. These companies do it for decades on end. Simply phenomenal.

      Best wishes!

  8. Anonymous says

    Hello Jake Erickson,

    Buying an index fund that pools many many stocks gives you instant diversification. My opinion however is that this advantage becomes offset by two limitations of the index fund.

    1. The fund will contain stocks of companies you know nothing about or not want to own in the first place based on fundamental metric analysis. Chosing the correct stock is crucial to your long term investment success.

    2. When you purchase the index fund you have no control over the valuation of the individual stocks at the time of purchase. You run the risk of purchasing a portion of the stock that are overvalued. Buying stock of quality companies should be done preferably when they are undervalued or at faire value, not when they are overvalued.

    Hope this helps !

    Norm

  9. says

    Excellent write up DM. I noted one point you mentioned for which I like this strategy and that is, that during panic selling, the dividend growth investor doesn’t care when everybody runs for exit and what the stock principal is doing as long as the dividend flow is intact. You actually buy more shares. And that is a brilliant strategy.

    If you are a new investor, you have to learn this approach to the market and stocks, because it is not easy to deal with horribly falling prices (similar to last weeks gold crash), but if you look at it from the perspective of your income which is still intact and raising, then you can deal with it with a big relief.

    • says

      Martin,

      Exactly. By focusing on the cash flow, a dividend growth investor is a bit less emotional during market downturns. Of course, if cash flow is seriously impacted then you have a problem on your hand. It’s always best to remain diversified and to keep an eye on ongoing business fundamentals. Even during the Great Recession most great dividend growth stocks kept increasing dividends, or at the very least kept them static. It was mostly financial stocks that cut payouts.

      And I do agree that this strategy befits a novice investor well, and not only for the focus on income which makes market swings seem less dramatic and trying, but also for the fact that the universe of high quality names that fit into this strategy are limited and typically are large, stable companies that are defensive and do well in downturns. It’s much easier to invest in Coca-Cola than some Silicon Valley start-up. You know what you’re getting even if you’re not totally experienced with financial reports and some of the more advanced techniques of investing and analysis.

      Best regards!

  10. Spoonman says

    This write up is worthy of publication on Seeking Alpha.

    Dividend growth investing requires some patience, but the payoff is immense. And, like you pointed out, it is far more passive than investing in physical rental properties (and also far more flexible, due to liquidity).

    • says

      Spoonman,

      Thanks for the support! Greatly appreciated. I’ve thought about publishing some stuff over at SA. I definitely have to get around to doing that, but this blog will always remain my main focus.

      DGI is definitely more passive than physical rental properties. No doubt about that. Different strategies for different temperaments and skillsets. For instance, if you’re extremely handy and a real DIY person then RE investing could be quite lucrative. Just not for me.

      Take care!

  11. says

    This is a very nice introduction to those not familiar with the strategy, a good refresher for those who are.

    For me the best part about dividend growth & income investing is not caring if your portfolio goes down in value. My portfolio could go down 30% right now and I’ll still be able to sleep at night… Like a baby I might add. The only thing that may prevent me from sleeping is salivating at all the wonderful companies on sale…

    I do like a good sale!

    • says

      Compounding Income,

      I’m with you! I love a good sale. Whether it’s chicken at the grocery store or stocks on the exchange, it’s great news. :)

      Yeah, if my portfolio value decreases by 30% the thing I’ll really be worrying about is how to whittle down my shopping list to just a few names. The shopping list would be long, indeed.

      Best wishes.

  12. Anonymous says

    I’m sure the dividend investors were not sleeping like a baby in 2009 when stocks were plummeting worldwide, if they were totally honest. Despite the fact that some great companies went on sale very cheap it is only human nature to have a pit in your stomach unless your name was Buffet. I totally agree dividend stocks is the way to go but lets not pretend it is all a bed of roses.

    • says

      Anonymous,

      There’s no free lunch. And the DGI strategy is not all a bed of roses. It does have drawbacks, and I tried to list a few at the end. This strategy isn’t for everyone, and some people will find other ways to invest capital much more attractive.

      I wasn’t investing in 2009, but I didn’t start long after. If I must be completely honest I took a look at the way share prices were dropping right and left at that time and thought to myself, “I wonder if now might be a great time to buy stocks?”. So, I guess I can only say that maybe I look at market downturns a little different. I didn’t have capital back then and I certainly wasn’t as educated as I am now…so we’ll never know. We’ll have to see if there is another major pullback and you’ll have to come by the blog and see how it all turns out.

      Take care!

    • Anonymous says

      Very honest response & appreciated. I think a few things come into play when discussing a major market drop such as we saw in 2009. One certainly is how close to retirement you are with your portfolio invested, were you fully invested prior to the drop or as you suggest, able to come in with fresh capital and look for bargains. When you start seeing names like Merrill Lynch, Lehman Bros.,Washington Mutual & AIG collapse it takes nerve to press the buy button. Those who did certainly were rewarded, but I think we both agree it looks much easier in hindsight. I enjoy your site & the comments.

  13. says

    Awesome post DM! Once a nut has been collected and invested, a well managed dividend growth porfolio should easily outpace inflation and last a lifetime and more! Who needs a 4% withdrawal rate?

    As you’ve alluded to in the post, true DG investing is not something that is truly passive. While you don’t need to monitor the day-to-day operations of your various holdings, it is absolutely imperative that you spend the appropriate time analyzing and monitoring the financial states of your holdings.

    • says

      w2r,

      Who needs a 4% withdrawal rate is right! My rate will likely be lower, as it will strictly be the overall yield my portfolio delivers. Either way, the assets will likely continue to grow at an impressive rate as the compounding effect is quite powerful when you have hundreds of thousand dollar bills working for you 24/7.

      DG investing is not 100% passive in the sense that once you have your positions you never need look at them again. There is still time required to analyze companies for initial purchase and the ongoing watchful eye must always be there. However, for most of the companies I’m invested in there is little need to constantly watch over them. Check out the quarterly results and listen to the earnings calls and that’s about it. There is likely to be little dramatic business changes for many of these large cap companies other than an occasional black swan we must always be fearful of.

      Best regards!

    • Onassis says

      I trust 100% (and more ;-) ) in PG, JNJ, MCD, PEP and KO until the end of my life!

      I think, I hope and I believe very firmly, that THESE five companies NEVER become a black swan!

      Are you with me, Jason?

      Kind regards!

      Onassis

    • says

      Onassis,

      I trust in these stocks as well, and I have a great portion of my net worth invested in them. However, that’s not to say that horrible events can’t occur or that competition can’t catch up. While I doubt that KO or PEP will find great competition from someone else over the next 10 years (their scale is huge and is hard to replicate in a short period of time, and the brands are well known and entrenched), there is always the possibility of a breakthrough of some kind that we can’t foresee right now. My favorite holding period is forever, so of course I hope these companies can continue growing indefinitely, but hope does not equate to returns and so one must always have a watchful eye on even the safest of companies.

      Good talking. :)

      Best wishes!

  14. says

    Nice article DM. Couple of other things I live about dividend investing:
    - Its tax advantaged income (no medicare, FICA deductions)
    - helps with capital preservation– to pay a dividend, you generally need to be cash generating!
    - my favorite- helps with accelerated path to financial independence. I love seeing myself cover more and more of my expenses each year!!
    Integrator

    • says

      Integrator,

      The tax advantage is one of the most attractive things about dividend investing. It’s a regular income stream that comes to you without having to take action on your part, and then it’s taxed at a lower rate. Compare that to having to work a 9-5 and take quite a bit of action on your part and yet also get taxed at a higher rate. That’s why I’m trying to move from the working class to the investor class. The grass is greener. However, I didn’t implicitly mention this only because capital gains are also taxed favorably.

      I’m with you on the tangible results and how it’s easy to actually see the progress as it happens. You can say “Hey, this month I was able to cover 18% of my expenses! Bad ass!”. That’s really cool. :)

      Best wishes.

  15. says

    Love dividend growth!

    I’ve switch from an aggressive growth stock trading strategy (which was successful) to dividend growth investing. The main reason was the lack of time. I love trading stocks, but I can’t concentrate on the stock market 2hr a day anymore as I used to.

    What I like about dividend growth investing is that once you have picked right companies, you can ride them for a very long time while you are getting paid quarterly.

    Definitely one of the best trading strategy!

    • says

      Mike,

      Thanks for stopping by!

      Absolutely. The key is identifying these high quality stocks and then just jumping on the wave. Who knows if the wave is everlasting or not, but I can’t imagine some of these companies (specifically consumer-based) ending their run of dominance anytime soon. And I’ll be happy to collect a rising income stream in the meantime!

      Best regards.

  16. says

    Hi Jason,

    Thank you for a very thorough and informative post. I had a couple of more practical questions. First, would you mind sharing what broker you use for your trading, and secondly, do you actually receive the dividend income, or do you have it reinvested?

    Regards,

    Jim

    • says

      Jim,

      No problem! Glad you enjoyed the post. :)

      I use Scottrade currently. I find the service to be great, the transaction costs fair and the fact that they have so many physical locations wonderful. I really sleep well at night knowing I can actually go down to a building and talk to someone if necessary.

      My dividend income is reinvested, but selectively rather than a DRIP. I pool the dividend income every month and combine it with fresh capital from my day job and use those combined sources of capital to purchase the most attractively valued equities I can find.

      Hope that helps!

      Best wishes.

  17. Mike says

    For example, Johnson & Johnson (JNJ) has been paying dividends in March, June, September and December (usually around the 13th of each month) for as long as I can go back. And you know that JNJ is going to send out their $0.61 quarterly dividend as they usually do, only until they raise it (likely to be announced in the next week or so).

    8% increase. WOOOOOO!!!!

    • says

      Mike,

      Loving that increase! Who doesn’t love a big pay raise like that?!

      I appreciate the small things in life, and seeing my dividends roll in…and then seeing them being raised is among one of my pleasures!

      Best regards.

  18. says

    Great post thanks DM,

    I like dividend growth investing because it provides a stable and growing income stream that you can eventually live off of without having to touch the principle. You can then pass the legacy you have built onto your kids or charity if you wish.

    Love the Blog.

    Thanks again,

    DF

    • says

      Dividend Freedom,

      Thanks for stopping by!

      Not having to cut down the limbs of your dividend tree is one of the most attractive aspects of dividend growth investing. And being able to pass along that wealth if you so choose to is also really wonderful!

      Thanks for the support and kinds words! Glad you enjoy the content here. :)

      Best wishes!

  19. Anonymous says

    Very nice article, and great replies. Now, please tell me when to buy, what metric(s) best inform us when to take the cash and spend it on the target stock. I have the stocks picked, I just want to buy them at the right time. I am certain being 100% in cash is backing up. Thanks in advance! Ernie

    • says

      Ernie,

      Thanks for stopping by.

      As far as buying stocks at the right time, there is no perfect formula or metric that is going to give you the answer. The best an intelligent investor can do is value a company to the best of his/her ability using known fundamental quantitative and qualitative information and then trying to buy for as far below that number as possible, thus trying to ensure a margin of safety.

      Best regards!

  20. says

    Thanks for sharing your thoughts Jason. Dividends are under appreciated and your article is inspiring and informative for those who want to learn about Dividend investing. I have a question / comment

    Q. You describe dividend investing as truly passive. which I agree ( we don’t need to worry about day to day operations ) , but we can’t consider it to be completely passive as index investing for example, since we still need to follow the company and review it’s financial reports ( at least once a year ) ? would love to know your thoughts.

    I recently stumbled upon your blog, your story is truly inspiring, thanks for sharing your thoughts here.

    Hari

    • says

      Hari,

      Thanks for stopping by. Glad you enjoyed the post!

      You make an excellent point there. I would agree that dividend growth investing is definitely not as passive as index investing. I wrote another article comparing index investing to dividend growth investing and stated as such. However, with that being said that additional passive nature comes at a cost in the form of management fees. Even though these fees can be quite low with some of Vanguard’s excellent products, they do undercut your returns over time – especially if you have a sizable portfolio. In addition, many funds have much lower yields than what an investor could achieve with a basket of high quality dividend growth stocks, on top of the fact that these lower distributions typically don’t grow in a similar fashion to what we’re used to seeing with individual companies like Coca-Cola, Johnson & Johnson, and the like.

      I would say that I definitely wouldn’t recommend dividend growth investing to everyone. I have a passion for it. I love owning a piece of real businesses as a direct shareholder. I love having voting rights. I enjoy reading through press releases and listening to conference calls. I enjoy being a part of a high quality business. And I especially love collecting rising dividends.

      As with everything in life, there are benefits and drawbacks. Sometimes I get caught up in the benefits only, as I’m biased. But I’ve written other articles that point out the benefits of index investing even while praising the dividend growth investing strategy. If one doesn’t have the time or inclination to follow a couple dozen or more companies then I wouldn’t suggest this strategy.

      I hope that helps!

      Best regards.

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