Why Dividend Growth Investing Is Such A Robust Investment Strategy For Those Seeking Early Financial Independence

treeI first started investing back in January 2010. I had NO IDEA what I was doing. I deposited $5,000 into my brand-new Scottrade account and got busy right away. I honestly don’t know what came over me, because I’m typically the type of person that researches a subject for countless hours before initiating activity; I’m not particularly spontaneous.

But I guess I was just so excited to get my journey to financial independence started. I was reading books like Your Money or Your Life and I was raring to go.

After stumbling out of the gate and feeling a bit lost, I sold everything I had bought and started over again. I figured if I wanted to be a successful investor, I should read about other successful investors. This of course led me to Warren Buffett and the idea of buying great businesses, focusing on value rather than price, and thinking like an owner. This was revolutionary to me and I’ve been investing with this knowledge in mind ever since.

It was during this time of early research, however, that I formed what would ultimately be the same strategy I use today. And that strategy is investing in high-quality dividend growth stocks. That basically means I take any excess capital I have left over after paying for expenses and purchase equity in great businesses that consistently post rising profits, and even better consistently share a piece of those rising profits with shareholders in the form of regular and increasing dividends.

So if you’re after financial independence at a relatively young age, I implore you to discover why dividend growth investing is such a fantastic investment strategy toward that end as I describe below.

Dividend Income Is Passive

One fundamental benefit of dividend growth investing is that dividend income is about as passive as it gets. Sure, there’s the initial “work” involved in analyzing and valuing stocks, although I don’t really find this work at all. But once you own a chunk of a company, that chunk of ownership (the shares you own) could potentially pay out more and more income for the rest of your ownership experience, assuming the company remains increasingly profitable. And this income will come your way no matter what you do.

All you have to do is wake up and you’ll automatically get paid. In fact, you could just stay in bed and not wake up if that’s your thing. It doesn’t really matter. What matters is that once you own a piece of a business that pays rising dividends, you’re a partial owner and you’ll receive your rightful portion of those rising profits. And this process is passive.

This is one huge reason I love dividend growth investing. When I’m financially independent I want to be able to focus on whatever it is I’m enjoying at the time: reading, writing, traveling, spending time with family, relaxing, or volunteering. Passive income gives me the opportunity to focus on the things I enjoy rather than constantly generating income. It’s exactly because income usually requires work on one’s part that many of us are seeking financial independence in the first place. We can cut the work out of the equation and still earn income. And this is why passive income makes so much sense.

I could have easily pursued a strategy of investing in rental properties or I could have tried to buy some local franchise or something else. But I don’t want to have to continue actively working for my income when I’m too busy enjoying life. If I want to work, then so be it and I will. But having to and wanting to are very, very different.

Acts As A Filter

I’ve found that most of the companies with particularly lengthy dividend growth streaks – at least 20 years – are able to grow dividends for decades on end because they’re wildly profitable. By honing in on dividend growth stocks you’re automatically filtering out most of the garbage out there. I’m not saying that stocks that do not pay a dividend are garbage, but rather you’re limiting your chances of picking up a dud of a stock by focusing on stocks that are able to increase both profits and dividends for long periods of time.

There’s thousands of publicly traded stocks out there. But, according to David Fish’s Dividend Champions, Contenders, and Challengers document, there’s only 543 businesses out there that have been able to raise their dividends for at least five consecutive years. Of that, only 106 have raised their dividend for 25 or more consecutive years. So you’re taking thousands of stocks out there and condensing that down into a few hundred or so. That makes research much more manageable.

Dividend Growth Comes From Profit Growth

And that filtering process brings me to my next point.

You simply cannot grow a dividend for long periods of time without being able to sustain these rising payouts to shareholders with rising profit.

Think about that. Let’s say you own a local business. It could be anything. Let’s say it’s a restaurant. And let’s assume you have some investors that fronted you some capital for equity in your new restaurant. And these partial owners want regular dividends on their investment. Even worse, they want more and more money as time goes on. These investors are greedy!

Well, if you’re not growing this business where does this cash come from? From the magical money tree out back? Nope. Typically, you have two choices: You can either tell these partial owners that you have no money to give them, or you can go out and borrow the capital necessary to pay these investors. But that will only work for so long, as you now have both debt and equity holders after a piece of the cash flow. Eventually, the balance sheet of the business is stressed and nobody will lend you any more money.

Think about what it takes to not only pay shareholders a dividend, but the kind of business that can pay more and more capital to shareholders for decades on end. That means the business is out there just dominating. You simply cannot pay and grow dividends for decades on end if the profit growth isn’t also there. So by focusing on growing dividends, you’ll naturally find yourself focusing on profit growth. Because with no profit growth you’ll eventually stop seeing dividend raises.

Dividends are the “proof in the pudding”, if you will. It proves the cash flow is there. You can’t pay dividends with cash that isn’t really there, at least not for long. And a dividend raise means management is confident about business operations going forward. Decades of dividend raises means management has been correct, and business operations are indeed solid.

Furthermore, the commitment of capital to shareholders in the form of rising dividends not only forces a company to grow, but also forces management to make prudent decisions with the capital left over. When a company is sending out a fairly significant portion of profit to the owners, the money left over has to be used wisely in order to maximize efficiency and return on equity. This creates a culture of good decision making for management, which bodes well for shareholders.

Income Versus Expenses

One of my favorite concepts from Your Money or Your Life is what the book described as a wall chart where you plot your investment income against your expenses. At some point in the future, dependent on your expenses and the passive income you’re able to build, you hit what’s called the “Crossover Point”, which is where investment income exceeds expenses and you’re essentially financially independent.

But what makes dividend growth investing so robust is that you can actually see the real-life passive income your investments are generating rise over time against (hopefully) lower expenses. It’s not a theoretical withdrawal rate where you could potentially sell off assets to provide a certain amount of income, dependent on stock prices. These are actual numbers.

For instance, last month I earned $699.43 in passive dividend income. And I can easily compare that against the ~$1,490 in personal expenses that I recorded for June. These aren’t theoretical numbers; these are real-life numbers based on real-life experiences. I know for sure no matter what happened in the stock market I was going to earn almost $700 in passive income last month. That’s certainly reassuring in a world where the stock market gyrates wildly from day to day.

And since I’ve been consistently recording both my monthly expenses and my monthly dividend income since I started this blog back in early 2011, I can clearly see the dividend income rising against expenses – with this last month nearing the 50% coverage mark. That’s real, tangible progress.

Eliminates Mr. Market

Speaking of gyration, the last thing anyone wants to deal with when they’re financially independent is the thought of having to go back to work because the investment income that they’re generating from selling off assets won’t last much longer. And this can happen if you’re abiding by a strategy where you’re selling off pieces of your equity ownership stakes a few shares at a time. If the stock market has a particularly bad year this can create a double whammy where your portfolio is devastated both by the market and your selling activity.

I instead have determined that the best way to make sure that financial independence is maintained once achieved is by living solely off of the passive dividend income my ownership stakes provide me. If my portfolio is a tree and every business investment is a branch, then surely the dividends are the fruit. Well, I plan to live off of the fruit. Selling off chunks of my portfolio, regardless of how the market is performing, is like cutting off the branches, which will eventually leave me fruitless.

Instead, by living off of the rising dividend income you can eliminate the stock market altogether. The dividends flow directly from a company to your pocket. So if Mr. Market is in a bad mood, you get paid. If Mr. Market is in a good mood, you get paid. It’s great to know that your investments will provide you with the livelihood necessary to pay for expenses, instead of relying on a fickle stock market. You’re a business owner, not a stock trader.

And by following this strategy you’ll eventually train yourself to focus less on stock quotes and more on the income hitting your brokerage account. In fact, after I was investing for a while I started to actually look forward to cheaper stocks. Once I realized that I can’t buy goods based on my net worth down at the local net worth store, I opened my eyes to the fact that a cheaper stock means a higher yield. And a higher yield means more income. More income means I can attain financial independence even faster.

Go With What You Know

The wonderful thing about many of the businesses that have been able to grow their dividends for years on end is that they’re familiar to us as consumers before we ever become investors. You don’t have to be some stock market insider to know Johnson & Johnson (JNJ), The Coca-Cola Company (KO), The Clorox Co. (CLX), or Chevron Corporation (CVX). Most people are already aware of these companies, and have some semblance of what they produce and offer society.

You don’t need to find the next social media darling or nanotechnology startup to become financially independent. Focusing on successful businesses that produce products and/or provide services that people all around the world rely on every single day almost ensures you wild success. These businesses essentially make the world go ’round, and they profit as a result. And then they share those massive profits with shareholders in the form of dividends.

I love being able to consume the products and/or services that the companies I invest in produce and/or provide. I’m drinking a Powerade Zero as I type this article, which is a Coca-Cola product. It’s fantastic to be able to intimately understand what the businesses you invest in do on a day-to-day basis. In fact, I would argue that if you don’t really understand what a business does you should probably stay away. Why talk yourself into something when there’s easier ways to make money?

Dividends Are A Major Part Of Total Return

Finally, I wanted to point out the power of dividends themselves, and specifically the growth and reinvestment of dividends. There are basically two components of total returns: dividends and capital gains. But whereas capital gains are the “exciting” part of total returns because you can see stock prices gyrate up and down like a roller coaster, growing dividends and the reinvestment of them is highly underrated and an extremely important part of your overall ability to build wealth over a long period of time.

Investors might assume that dividends are half or less than half of what one might receive in terms of total returns, but that actually isn’t the case.

As I pointed out earlier, when I first started this journey I read about hugely successful investors. And I noticed that many of them held major positions in really great businesses that pay and raise dividends.

Even someone who isn’t a big fan of individual stock investment, John Bogle (the founder of Vanguard), has recognized the power of dividends and dividend reinvestment over long periods of time, and how they build wealth.

Per adapted comments made to the Financial Industry Regulatory Authority in 2007, as can be found on ETF.com:

Consider this: An investment of $10,000 in the S&P 500 Index at its 1926 inception (Figure 2) with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4 percent compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1 percent compounded)-an amazing gap of $32 million.

Over the past 81 years, then, reinvested dividend income accounted for approximately 95 percent of the compound long-term return earned by the companies in the S&P 500. These stunning figures would seem to demand that mutual funds highlight the importance of dividend income. But in this era of ”total return,” income is virtually ignored.

Furthermore, Ned Davis Research, Inc. has done considerable research on dividend growth stocks against other non-dividend-paying stocks and the broader market as a whole, and J.P. Morgan Asset Management released a report last year citing Ned Davis Research, Inc. and some of their findings. It is interesting to note in the study that dividend growers and initiators posted average annualized total returns of 9.5% from January 31, 1972 – December 31, 2012, while non-dividend-paying stocks posted average annualized total returns of just 1.6% during this same 40-year stretch. That’s a pretty stark difference.

Conclusion

So there you have it. I’m a dividend growth investor seeking early financial independence, and a proud one at that. I truly believe this is a robust and powerful strategy for anyone who has the patience and temperament necessary to invest in stocks and see the journey through to the end.

And I’m doing more than just writing about it. I’m living and breathing it every single day, and putting (all) my money where my mouth is, as I continue to maximize this strategy on my way to financial independence.

I believe in this, but I encourage you to find the best strategy that works for you and your needs. It may not be dividend growth investing, but whatever it is make sure you learn as much as you can about it and use every advantage you can.

Full Disclosure: Long JNJ, KO, CLX, CVX.

How about you? A fan of this strategy on your way to financial independence? 

Thanks for reading.

Photo Credit: vectorolie/FreeDigitalPhotos.net

Similar Posts

150 Comments

  1. Another great article Jason! I am planning on starting to accumulate dividend stocks in my ROTH, but it is almost overwhelming how many stocks there are to choose from!

  2. DM,
    You point out a lot of good reasons why so many of us plan to rely on dividend income in retirement. The ease of getting started and the passivity of dividend growth investing are probably the two most attractive reasons to use this vehicle. Real estate has a much larger barrier to entry. Fixed income doesn’t provide the growth to cover inflation. I like your fruit and tree branch analogy. Most of the ‘professionals’ out there focus on withdrawing money when we retire. When you withdraw, it lowers income. We’ll all withdraw money from our portfolios some day, but the later the better, and hopefully not until after age 59.5 from retirement accounts.
    -RBD

  3. The more I read and research about the dividend growth investing strategy, the more I agree with it and think it will be my strategy when it comes to investing. I’m yet to take the plunge, as I’m worried about fees; in the UK they can be high if you’re not careful. I’m still researching where to keep my investments, so that they’ll work the best for me. I’ve got a list of potential companies to buy into once I figure it all out! Again, another brilliant post by yourself.

  4. Your Money or Your Life is my wife’s favorite personal finance book. She raves about it constantly and I am yet to read it. Its just sitting there on my bookshelf staring at me everyday and I still havent come around to open it up. Since you are quoting it on your blog, I will bump that up on my reading list 🙂

    A great article again, Jason. Always good to read why people consider DGI a good investment strategy and can be a great educational read for beginners.

    regards
    R2R

  5. In the world of picking stocks there are just so many to choose from. Like you said dividend paying stocks and mainly aristocrats act as a fine filter to find the cream of the crop. I love how dividends show how the true story of the stock is doing company wise compared to its volatile share price affected mainly by market conditions at times.

    Loved the article!

  6. RBD,

    I’m with you. Real estate definitely has a much larger barrier to entry, in addition to lack of diversification and liquidity. Not that you can’t do incredibly well with it, but I simply identify more with this strategy. Owning a few REITs is my preferred method to access real estate. 🙂

    I definitely hope to never be in the position to where I have to sell assets for income. As long as the dividend growth exceeds expense growth over a long period of time, that spread should provide a solid buffer for unforeseen issues. We’ll see how it goes!

    Best wishes.

  7. Kipp,

    Thank you! 🙂

    I know how overwhelming it can seem at first. I’d simply stick to what you know, and try to pick out the best value you can that suits your goals and needs. There’s a learning curve, and the good thing is that when you’re first starting out you’re generally dealing with a relatively small capital base. So you really can’t do too much long-term damage, as my experience shows.

    Have fun shopping! 🙂

    Cheers.

  8. Nicola,

    Well, fees are a bugger. I pay $7 per transaction, so I try to make sure my transactions are large enough to limit the impact of fees over time. I don’t know how you pay fees over there, but if they are on a per-transaction basis, then I would simply try to make sure they add up to less than .5% of the total transaction. It’s a little more than I’d like to pay, but I know that over time this will scale itself down and eventually mostly disappear.

    Thanks for stopping by!

    Take care.

  9. Great points DM,

    When I was studying in univesity, I tried to double my money in fews days, bought some hot stocks and burned my hand. It was a great lesson for me at the early stage with less money. So, I won’t turn that side again.

    Now, I am doing really well with dividend stocks and some of my holding are about to double their value. And, feel so great to get multiple cheques from multiple companies, but feel shy to receive money without doing nothing :D.

    Best wishes,

  10. R2R,

    Thanks for the kind words. Glad you enjoyed the article. 🙂

    YMOYL is probably my favorite personal finance/FI book out there. It provided a ton of value to me when I first read it because it really opened my eyes to new possibilities and a new way of life. I really can’t recommend it enough, especially to those just starting out.

    Best wishes!

  11. Asset-Grinder,

    The cream of the crop, indeed. 🙂

    And dividends do tell you what’s really going on. You can’t pay dividends to shareholders with imaginary cash.

    Thanks for stopping by!

    Best regards.

  12. Great article on dividend growth investing. My tree grows a little bigger month after month except when there is a dividend cut. Overall the rate of growth of the tree increases faster and faster and the dividends ( i.e. the fruit) gets larger and larger as time goes by.

  13. FinanceJourney,

    Thanks for sharing!

    I went through a similar experience when I first started. I wasn’t trying to double my money, but rather I was trying to invest without knowing exactly what I was doing. Big mistake.

    Glad to hear you’ve been doing really well with the strategy. Getting paid for doing nothing is the name of the game! 🙂

    Take care.

  14. IP,

    A bigger tree and more fruit is where it’s at. I don’t really pay much attention to the size of my tree, but I suppose it’s hard to ignore it when you’re standing in the shade. 🙂

    I never understood the desire to sell off assets. Besides, fruit tastes better than wood.

    Cheers!

  15. Great article, Jason. FI is a beautiful thing, and a most worthy goal. I’ve only been focused on DGI for about 3 years now and I have much to learn yet. Still, I’m already happy with the results.

    I have reached the big Six-Oh. My wife retired 3 years ago. I had come to believe that I would be old and feeble before I could retire. My pension is just never going to be large, even if I choose to work another ten years. Over the last few years, we have crunched numbers multiple times and made efforts to enhance our retirement finances. DGI has been one of those efforts.

    Well….. guess what! I think we have reached the tipping point. I’ll know for sure once I meet with our financial guru, but I believe we can declare our projected retirement income to be “good enough” at minimum. Using my forecasts, if we can’t get by with what will be coming in, we will be doing something wrong. DGI is one element of our retirement income. It’s also what basically pushed us over the goal line. Without our dividend income, I would feel much less secure about retirement.

    I believe it’s safe to say that my last day at work will be October 31. My wife will buy me a t-shirt that says “I don’t want to, I don’t have to….. you can’t make me…. I’m retired”. I will have reached our FI goal. Yeah, it will be about 20 years later than you are shooting for, but it’s way better than never getting there. Next step…. figure out what I want to do with my time. I’ve got some ideas but no final decisions yet. My first month or two, I’ll be doing whatever I feel like doing….. just because. Then we’ll go from there.

    If you can accomplish FI by age 40, just imagine the possibilities. 🙂 Keep up the good work.

    Steve

  16. Steve,

    That’s wonderful news! Congratulations! 🙂

    I’m sure the you of today is glad that the you of a few years ago took control of your finances and put you on track for this. That’s wonderful. Nobody cares more about your money than you do, and I’m so glad you decided to care as much as possible.

    The next big thing will be figuring out what you want to do with your time. That can be difficult at first, but I recommend just to let it flow from within. And I also fully support doing nothing at all sometimes. Sometimes we need inactivity to build up the creativity and inspiration to do something great.

    Really great news. Best of luck as you wind down one chapter and begin a new, exciting one.

    Cheers!

  17. Thanks a lot for this post DM. It is good to remember those facts and never forget them while initiating new positions. I utmost like your tree analogy. Am still hesitating to buy KO. I think it is fairly valued now, but still dare not take the plunge.

    Best to you

  18. I think there are many avenues to Financial Independence. A better statement would be Personal Financial Independence since everyone has their own avenue and you have found yours. I’m early in the journey to PFI and I certainly understand lure to dividend investing, I think the 2 biggest are mentioned in your article with it being almost entirely passive and the break even point of receiving dividend income vs expenses.

    I don’t think there is a perfect model out there for FI, but rather some combination of 3-5 items, but one item adds up to all of these and that’s simply saving money. DM, I’m not going to say I’m hooked, but I certainly will have a portion of my FI plan in dividend stocks. Nice article, also what kind of fruit is on your fruit tree in your analogy?

  19. I would agree with you on KO. Seems slightly overpriced at the moment. I wouldn’t initiate a position unless the current yield was above 3%. Basically, below $40. Even better would be $38. Just my opinion of course.

  20. Aspenhawk,

    I also agree that KO is pretty fairly valued right now, perhaps even bordering on overvalued. Although, I’ve been guilty of paying full price lately for some stocks. Not really much else one can do when most of the relative bargains have disappeared. I’ve been trying to focus on quality lately rather than seeking the absolute cheapest. We’ll see how that treats me over the long haul.

    Cheers!

  21. Steven,

    Couldn’t agree more. There’s more than one way to skin a cat, and we all have to find the strategy that suits us best. For some, that will be real estate. Others might find index investing best. I personally find dividend growth investing best, but that’s just one man’s opinion. In the end, it’s about choosing what works best for you and your goals. 🙂

    The fruit on my tree isn’t just one kind of fruit. I’ve got 47 different varieties. I’m getting pretty close to Heinz’s tagline with their “57 varieties”.

    Best wishes.

  22. Choosing what you know is a good idea… still I look at that list of Champions, contenders, and the up and comers… just wow, I didn’t realize I knew so many companies that have paid dividends for years! And then on the accounts payable side I know even more that my work does business with. Would I have known what Air Gas was if we weren’t getting anything from them? Probably not.

  23. Great post, Jason. As always. I can’t agree more. Divident is king.
    It’s a pitty that up here we are taxed to death on dividents. So I focus on total return = div + growth. It’s unfortunate that I have to, but so it is.

    Cheers.

  24. Point well taken. I just reviewed my Vanguard profile, and it shows the following performance among all accounts since inception:

    Market app/dep: $16k
    Income return: $6k
    Total: $22k

    It’s difficult to imagine that my assets are worth $22k more net than I put in. A few losers were sold, and some things exchanged for others, but largely I don’t sell too much.

    All that senseless trading just isn’t worth the effort since most of my holdings are between $2-4k. It really won’t make a difference if I “take gains” and lock in $500 in 10 years when my portfolio is worth over $500k.

    I’ll take the risk that some of my holdings won’t turn into monster successes like JNJ, but some may. Only time will tell. Wow, being patient is such a challenge!

  25. I’m very like minded. If you go into company financials, you see a lot of non-GAAP, EBITDA, one time expenses, and other technical things that I won’t go into that make me question the true nature of some company earnings. A steady, growing dividend over many years provides a good comfort level of earnings power.

  26. I like the way Financial Samurai describes real estate. Not everyone can be a landlord, or wants to be one, or has the resources. In his analogy, owning investment properties is akin to being “long” RE, owning zero property is like passively avoiding RE, and owning your own home is like being “neutral” RE over the long term.

    I agree the stocks/investments will likely outperform over the long run, but do plan to own at least my own home and maybe 1-2 other properties if it makes sense at the time, but likely only with a property manager (I am pretty lazy, after all). 🙂

  27. Hi DM,

    Great write up. I enjoyed reading. Unfortunately most people wil never get this. We sit in the shade of trees we did not plant or did plant at a young age. I’m sure the 40 year old me will be thankfull that the 20 year old me( age that I started investing) did plant the seeds.

    Cheers,
    G

  28. I was already sold on the strategy! Although, reading a pro-DGI website isn’t going to sway me in the other direction. Speaking of which – have you considered covering the other side of DGI? E.G. what are the naysayers saying nay about?

    I kept PM and KO, FYI. Didn’t write about it on the site, yet.

  29. Nice article. As a dividend investor myself, I completely believe in dividend reinvestments, either through DRIP or otherwise.

    But lot of times when comparing the overall portfolio value with and without reinvesting compares the end value of the portfolio, but ignores the dividends taken out and not reinvested.

    For instance, in the above example where you mentioned the value with reinvesting is about 33Mil and value without reinvesting is 1.2Mil, it ignores the dividends that was received (but not reinvested)… so the difference is not really 32 Mil, but less than that. Of course, it is not going to match 33Mil, because the effects of compounding is much more, but not sure why it is always ignored.

    Just my two cents…

  30. DM,

    As usual, I enjoyed the article and agree with the majority of your reasoning. However, I will take some exception to this paragraph:

    “I could have easily pursued a strategy of investing in rental properties or I could have tried to buy some local franchise or something else. But I don’t want to have to continue actively working for my income when I’m too busy enjoying life. If I want to work, then so be it and I will. But having to and wanting to are very, very different.”

    Your lumping all rental property investors into the same group. There are “Landlords” (who do work the properties on occasion thereby classifying their investment income as semi-passive. On the other side of that real estate coin, there are investors. We buy the rentals and then hire a rental management company to manage the tenants, repairs, pay the bills, etc. As a real estate investor (who chooses to hire out the landlording), my income is every bit as passive as a dividend stock portfolio. I sit back and collect my monthly rental proceeds check whether I wake up or not 😉 I don’t have to worry about what the tenants or the houses are doing. It’s passive.

    The time I do spend looking over my monthly rental statements or sending an occasional email is certainly less time than it takes to properly read the quarterly financial statements for 50 companies. That is also work. Yes enjoyable to a few like you and me, but none-the-less, work. And it should be done. You can choose not to, or greatly delay that particular company ownership chore, but you do so at your own risk. Not even a DG portfolio is 100% passive.

    Anyway, I just wanted to set the record straight regarding the oft-maligned real estate who does chose a truly passive route to that portion of his portfolio.

  31. Jos,

    That is unfortunate to have to pay a lot of taxes on dividends, and the US hasn’t always been so kind to dividend taxation. However, even if the tax situation were different I’d still probably pursue this strategy with the mindset that my total income in early retirement won’t be that high anyhow. Minimizing taxes isn’t my foremost concern, but minimizing income and expenses usually naturally comes with the benefit of lower taxes.

    I guess you take the good with the bad, and I’d certainly much rather live in the US and pay taxes than live somewhere else with less taxes and very poor quality of life.

    Cheers!

  32. Ravi,

    I’m with you as far as trading goes, and the more I learn and grow as an investor the less I sell. In fact, going forward I’m going to try to commit to sales even less than I have in the past. I once heard a portfolio is like a bar of soap; the more you handle it, the less of it you’ll have in the end. And I think that’s pretty apt. 🙂

    It’s a huge mistake to sell winners. I’d rather just let them continue to run and not really worry too much about the duds when/if they happen. I’m bound to invest in a few losers, but the winners will likely far outweigh them anyway.

    Best regards.

  33. envisionhappy,

    I’m with you. Cash doesn’t lie like a statement can. You either have the cash or you don’t, and the dividends bear that out.

    Thanks for stopping by!

    Best wishes.

  34. Ravi,

    I’m not sure if I’ll ever own my own home or not. I don’t really particularly enjoy the thought of cutting grass, shoveling snow, raking leaves, cleaning gutters, fixing things, painting walls, large one-time expenses, etc.

    But I still believe in real estate. However, I’ll just allocate a small portion of my portfolio to REITs. In addition, many of the companies we invest in own commercial real estate (MCD), so there’s exposure there as well. Single family homes are typically poor investments over long periods of time, but I understand we all have to live somewhere. It really becomes a lifestyle choice at some point.

    Take care!

  35. WE,

    I looked at all angles before I started this strategy. So I investigated mutual funds, index investing, dividend growth investing, value investing, growth investing, income investing, real estate investing, entrepreneurship, etc. I picked what suited me and my goals and haven’t really looked back. To worry about what naysayers have to say would only really impede my progress and waste precious time. I just really don’t worry about that stuff.

    I think you made a great choice there with KO and PM. They were both decent positions for you, and the numbers worked out. Congrats again on the house! 🙂

    Best wishes.

  36. Curtis,

    Great points there.

    Hiring a management company, however, doesn’t eliminate all the work or any of the risk, as far as I understand it. It certainly creates a more passive investment in exchange for a fee, but I didn’t think it eliminated all the work for you. Rather, smaller issues are simply delegated for you. Furthermore, it depends on the quality of the management company. I rented a two bedroom condo down in Florida for a couple of years, and we had a management company act as a third party, and they were horrible. We would routinely have to contact the owners for issues like the electrical system in the laundry area not working (after repeated phone calls to the management company) and a mold/water issue in the bathroom. They then switched management companies. Guess what? Same issues.

    I’m not saying that anecdote applies to all situations, but I think big decisions are still left to you, unless I’m incorrect about that.

    Furthermore, there’s a cost to increasing that passivity. I won’t have to pay anyone to “manage” my stocks, and that’s because they simply require less work than a similar army of rental properties.

    But this is really an apples vs. oranges (stocks vs rental properties) comparison. I was simply speaking in broad terms as to the passive nature of collecting dividends vs. managing rental properties.

    Best regards!

  37. Nice article, Jason.
    I own the 4 stocks you mentioned, but my second largest holding is Apple. I think sometimes you have to go outside the formulas and look for companies that can become the next dividend Champions. This should be no more than a small part of your portfolio, but could potentially yield the greatest gains. Otherwise, you are spot on.
    KeithX

  38. Great article! You can’t go wrong with dividends. The point of being in business is to make a profit. And dividends are a strong reflection of those profits!

    Cheers,
    Henry

  39. KeithX,

    Great point there. I definitely agree it takes a little thought outside the box to spot the trend and see what will eventually be there. I’ve certainly invested in companies that I think will be future Champions, or those that were once a serial dividend raiser and then fell on hard times. TIS, GE, WFC, BP, BNS, and TD come to mind here. We’ll see how they shake out.

    And I just recently initiated a position in another company that isn’t a CCC stock. I’ll be discussing that Sunday! 🙂

    Cheers.

  40. Henry,

    Couldn’t agree more. Don’t tell me how profitable you are; SHOW ME. Amazon is a great example of a company that can generate a ton of revenue with very little profit. No, thanks.

    Appreciate you stopping by!

    Take care.

  41. Very little value in this market. However GE KMI ARCP PGH look great! Look ing to add to current positions. What’s your take!!!!! Were all waiting for a pull back, that might not happen for sometime????

    all the best,

  42. j-harr,

    Those are some great picks, in my opinion. I’m actually strongly looking at GE and ARCP myself right now. I don’t personally follow PGH, so I can’t really say. I’m a big fan of KMI, and thought about adding more when it was really cheap there around $31. But I’m really already heavily exposed, and one has to be careful as the entity is quite leveraged.

    Have fun shopping. 🙂

    Cheers.

  43. DM,

    My strategy is very much aligned with living off of dividend income. I won’t say I might not delve into other investments from time to time to try and profit and have excitement. That will just be a less and lesser amount I’m willing to risk with. I agree with a difference between wanting/liking your work and having to settle for a job that causes misery.

    I am really feeling like I want to follow writing and see if I can find myself in a similar situation as you and some other early FI bloggers so I can escape or at least have an option to be free ASAP.

    Thank you for clearly explaining why dividends are mostly passive and important to the success of the greatest investors.

  44. Jason,

    Great post. It feels like your posts are longer and better (even though you always wrote great posts) since you quit your job. I really enjoy reading them.

    I agree that DGI is an incredible strategy, pretty straightforward to follow and very rational. It’s an addictive strategy too. It feels like if I was playing one of those old board games like Monopoly. I just love it.

    Keep going!

  45. DM check out PGH look @ FFO over the next 5 years, I think it worth a read going forward. Just ones opinion, Like ARCP at current levels!!!!!! I’m currently carrying 15% + in cash looking to put some to work.

    Thanks,

  46. SWAN,

    Thanks for stopping by!

    You might want to try giving the writing thing a go, if you are confident in your ability to generate income from it and your investments already cover a sizable portion of your expenses. At that point, the risk might be smaller than you think. 🙂

    I viewed the idea as very low-risk because I knew I could always go back to working at a car dealership. It’s not like they’re going out of business anytime soon.

    Wish you the best of luck either way!

    Take care.

  47. Allan,

    Thank you. Really appreciate the support.

    The posts are getting a bit longer. I’m not trying to be overly verbose because quantity doesn’t equal quality, but I feel like sometimes I just have so much to say about a certain topic. I actually usually cut myself pretty short.

    I loved Monopoly as kid. Maybe that’s why I love accumulating equity stakes that pay me regular income as an adult! I feel like I’m passing Go and collecting my $200 pretty often nowadays. 🙂

    Best regards.

  48. I like the soap analogy! Great way to help resist tinkering when the investments are working their (slow) magic.

  49. Hi, long time reader, first time commenter. You’re giving me hope that someday I’ll be able to achieve financial independence. My DGP just reached 6 figures last month and so far I have been able to save around 20% of my income.

    When I discovered DGI, what I really like about it is knowing when will I get paid and how much will I get paid. Cant get that certainty with growth investing.

    Thank you for your blog and its message, I wish all the luck in the world.

  50. Motivating and factual post.
    I love the money tree.
    Enjoy the fruit(dividends), but don’t cut off the branches(sell capital)
    Love it!
    Soon your tree will be massive.
    Have a great weekend

  51. Hi, Jason. I appreciate the response.

    Let me take this comparison a little further down the road…

    You aren’t paying anyone to manage your stocks, but make no mistake, you are paying a management company to run your businesses. As you correctly stated, an owner of company stock is an owner of a company. You pay a board of directors and officers along with upper, middle and lower management to run your company. You get a dividend based on a percentage of what’s left, i.e. the net profit.
    That is the cost of doing business for every single one of your ~40-50 companies pay to run the business for you. You factor that in and decide that the dividend is sufficient AFTER paying those management expenses. That’s the cost YOU are paying for “passivity”.

    Successful real estate investors have already factored the cost of management into the equation. We’re not paying extra for it any more than a dividend investor. The ROI is usually greater for real estate. It takes far less cash to get the same returns.

    Yes, property management companies (like fortune 500 management teams) can either be good or bad. It’s the same either way. Bad management will require you to sell your investment. Good companies in the dividend investment universe have become bad companies and bad investments.

    True, Real estate investing and dividend growth investing is not an apples to apples comparison. However, there is more in common between the two investment choices than meets the eye. And done right, both are equally passive. Some people get that and some never do. Just as some people understand DGI and some (Capital appreciation proponents, for example) rarely get it. That’s ok.

  52. I’ve been reading your website for a few weeks and have had a part of my portfolio in dividends since 2008. After six years, I’m convinced this is a great way to go. My dividend portfolio has performed very well. I have 11 stocks and reinvested the dividends during that time. Over the last 8 months, I have moved about 60% of my stocks into my dividend portfolio and now have it rounded out at 35. Thanks for your insights and keep up the good work.

  53. Fred,

    Thanks for the readership. And thank you for taking the time to post a comment! 🙂

    A big congrats on crossing the six-figure mark! That’s really fantastic. I found the snowball effect really start to take hold for me after I crossed into six figures. I’m confident you’ll find the same.

    And I’m with you on the certainty of income in regards to dividend income. Who knows what’s going to happen to stock prices tomorrow, but dividend income is pretty much a lock.

    Keep up the great work with your portfolio and the savings!

    Best regards.

  54. dividendsfree,

    Thank you for the support!

    Fruit is tasty, especially when it’s consumed in the shade of a wonderful tree. 🙂

    I hope you have a great weekend as well.

    Cheers!

  55. Curtis,

    I hear you. There’s no free lunch in life. That’s true with any asset class out there. There’s always going to be commissions, management, middle men, etc.

    However, I still feel the costs associated with building and managing a dividend growth stock portfolio will be far less than a similar rental real estate portfolio. We can agree to disagree on that, but factoring in the costs to go out and get just ONE property involves bank fees, realtor fees, title fees, etc. Then you add in the recurring property management fees. And then multiply that across multiple properties. I pay $7 per stock purchase.

    In fact, if you wanted to really compare apples to apples you could go out and buy just one REIT (let’s say O) for $100k and pay $7. Try doing that with a $100,000 house. And you’re then comparing thousands of properties to just one. And the “property manager” is already built in.

    However, I also view rental properties as a more lucrative investment to a stock portfolio, if managed correctly. I’m sure if you know what you’re doing, you get the right tenants, the area stays nice, the deal from the outset was solid, and the property doesn’t kill you with maintenance and repairs the returns will outpace a similar dividend growth stock portfolio. But leverage is generally involved, like in your case. I could have easily generated greater returns riding the stock market up and likely have a portfolio triple my size, but I didn’t want to take that risk on. Because it could have just as easily went the other way. Hindsight is 20/20, but I feel safe knowing my money is all my money.

    Again, an apples to oranges comparison. But I do stand by my opinion that real estate is more expensive and less passive. However, I also agree that it can generate greater returns.

    Cheers!

  56. I agree with each of your points.
    In fact, I do both.
    I have 80%DGI and 20%rental properties.
    I like the diversification.
    Neither is taxing on my time, but both require attention.
    On the one hand, I love walking by my property and seeing a “real asset” and understand it better than my stocks perhaps.
    Still, my DGI is anonymous, passive, and compounding faster, thus far.
    I wouldn’t sell either, and enjoy the income from each equally.
    Either are better than entering the matrix and showing up in a cubicle and strapping on a headset.

  57. Michael,

    Appreciate the readership very much. And I’m glad you found some value in the posts. 🙂

    Congrats on the success thus far. I hope you continue down that road, even when there’s some volatility. Volatility is opportunity. They even sound alike.

    Keep up the great work. And stay in touch!

    Best wishes.

  58. Kipp,

    I would say start with 5-10 companies in diverse sectors so as to spread your bets and DRIP your way to add positions gradually. This becomes even more important for you if you are starting out as currently market is fairly or overvalued in my opinion with no correction occurring in almost last 2 years. I’m on the side lines right now and building cash position and pull trigger when I start to see some correction.

    Best luck on your journey towards DGI.

  59. Hi DM,

    I read it the same way as DGJ – he said, “If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 “. The first part of the sentence says that the dividends weren’t re-invested and were therefore spent on something else.

    But of course, this just shows the two-fold power of dividends; they represent extra income that you can reinvest and you’ll own more shares as a result which earn yet more dividends and more capital growth; that’s in addition to the additional income from dividend increases.

    Dividends = More shares + More income + More capital growth…what’s not to like? 🙂

    Thanks for writing a great article!
    Best wishes,
    – DL

  60. Another great article! I am with you 100%.

    One of the things that I like about DGI is that it is about as passive as it gets. I don’t have to tool around with rentals and crazy tenants. DGI doesn’t become a second job, it simply keeps working for you around the clock and gives you good raises every year.

    The only downside is that, in exchage for rock-solid passive income, you have to accept a low initial yield. But over time that income gains momentum and becomes a great force, and all you have to do is make sure the company fundamentals are OK.

    The market may be ready to take a dive, but I won’t care as long as my companies continue to grow their earnings, just like they did during the Great Recession. If you look at MCD, it’s earnings didn’t give two shits about the financial meltdown, they just kept increasing like clockwork.

  61. DM – I’ve been investing in dividend paying stocks exclusively for less than one year. Before that, I was in riskier growth stocks trying to chase the next high flier. It didn’t take long for me to see results and become a believer in dividend growth stocks. And seeing other bloggers throughout the dividend blogging community like yourself succeed before me has certainly helped boost my overall confidence in this strategy of dividend growth stocks.

    Cheers to reaching FI through dividend stocks investing! AFFJ

  62. Dividend Life,

    That’s incorrect.

    He’s comparing the reinvestment of dividends to the non-reinvestment. The dividends don’t disappear simply because they’re not reinvested. And assuming they’re “spent on something else” is also incorrect. Dividends don’t just get spent because they’re not reinvested. They could just as easily collect in the account forever. They’re just not reinvested. But they’re still counted as part of the total return. Dividends count as a portion of the total return whether they’re reinvested or not (dividends + capital gains = total returns). Dividend reinvestment simply amplifies that total return by compounding the dividends over and over again, which is demonstrated by the math.

    I hope that clears that up for you?

    Cheers!

  63. Spoonman,

    I’m with you. Not only is it not a second job, but it’s like a second income but without the work. It’s wonderful to know you might have a $5/hour or $10/hour worker out there hustling and bustling and sending you all of their wages. No room or board necessary! 🙂

    And I’m optimistic that most of the companies we invest in will be just fine during the next major economic slowdown. Of course, there will be issues. But that’s why you diversify and monitor your holdings.

    Thanks for stopping by.

    Best wishes!

  64. AFFJ,

    I’m really glad to hear that. There’s certainly more than one way to achieve financial independence, and DGI is but just one of many. But I definitely feel it’s definitely a robust strategy. And the benefits are tangible. You can actually see the passive income rise before your very eyes. That’s pretty powerful, and serves to reinforce one to keep at it. Success begets success.

    Glad that you’re taking the steps toward FI and beyond. 🙂

    Cheers.

  65. DM…you still paying $7 per trade even after I referred you to MerrillEdge? I’m enjoying those 30 free trades per month and you should be too:-)

  66. Hi DM,
    OK I understand your position now. I didn’t interpret his term “value of investment” to mean “total return of investment” – I took it to mean market value of the portfolio which wouldn’t have included any capital increase from dividends since they weren’t being re-invested.

    Best wishes!
    -DL

  67. Another great article. Most of my stash is in the S&P 500. I chose this over the more common total stock market fund, primarily because I liked it’s dividend yield. Its extremely important for compounding IMO. The big thing way back was the nifty 50 investment. When I look at those nifty 50 now a huge majority of them are duds and I found this to be a bit scary, so I sold most of my individual stocks! I don’t have a high tolerance for risk :).

    It would be awesome if you did an article on your favorite 10 stocks for the next 30 years. I still own KO, KMI, JNJ, WFC and VZ. I’m thinking down the road I will get back in on T, SO, PEP, XOM, CVX. What are your thoughts?

  68. Here is the main reason I stayed with the S&P 500 over my dividend stock holdings. As you can see the S&P 500 destroyed these staple dividend stock holdings by around 15% this last year. If a person had 200k invested that would be about 30k profit difference in just one year. Hard to beat with never thinking about it and the S&P500 index fund holds monster diversification (500 of the best companies on the planet). I have to be honest though it is fun to get dividends posted to my account, but money is money. These trees are tasty! These are the 1 year returns from my previous stock holdings:

    S&P 500 18.99%
    JNJ 17.99%
    KO 3%
    PEP 8.57%
    XOM 9.97%
    CVX 5.24%
    T -0.47%
    KMI -9.26%
    PM -4%
    SO 0.93%
    O 4.51%
    WMT .38%

    I will point out that I do believe these consumer staple stocks will do a bit better in bear markets than the S&P 500. No wonder Warren Buffet has trouble beating the S&P. Some of the baddest 500 companies on the planet are nice to own! Thank you Mr. Bogle. I think the earnings growth rate has been about 14% or so this last year for the S&P 500. That’s pretty stupid good. I’m sure there are many dividend companies that did well. Just pointing out ones that I held. Thanks again for all that you do.

  69. Jason,

    Haha. Yes, I’m still with Scottrade only. 🙂

    I guess at some point I’ll have to get started with that service if I ever want to get to $25k so I can get the free trades. I do plan to diversify brokerages at some point here, and this one seems to make a lot of sense. I suspect it might take me a year or two to get to the $25k, depending on how much capital I can commit. But $0 trades sounds pretty nice!

    Cheers.

  70. Monty,

    Like I’ve said before, investing in a low-cost S&P 500 index fund is a great way to invest. Just remember that when you have sizable assets (say, $500k or so) those fees can and will add up.

    And I think you might be using just price changes there as the return. The dividends will count as well, and I think JNJ has beaten the S&P 500 over the last year. Of course, many have not…and that’s why you diversify.

    But I wouldn’t really compare myself like that anyhow. In fact, I’d look forward to a stock vastly underperforming the S&P 500 index. Since I’m investing for the next 30 years, and not just one year, that underperformance likely gives me an excellent opportunity to buy up equity on sale, assuming the valuation is attractive. I just have a different perspective on that.

    Best of luck! 🙂

    Cheers.

  71. Hi Jason,

    This article is bang on. I have been reading your blog for a while and completely agree with your approach. I like books from the 1940s like “Security Analysis” by Graham and Dodd. My own approach is to rely solely on dividends for a stable base income whilst retaining the opportunity to reap capital gains by selling if the reasonably priced stocks I own are bid up to a ridiculous price. This can happen I believe when the momentum chasing chartists outnumber the analytical investors. This though, is a completely unpredictable event.

    Your comment about enjoying it when the price goes down is a great one. For me, it’s all about buying as much income as possible at as low a price as possible. If we are re-investing our dividends for example, then if the stock market halves we can be growing our income twice as fast as each re-invested dividend will buy twice as much income.

    A good way to think about predicting the dividend growth is the T-model which seems rarely discussed. In a nutshell, if you had a company with a P/E ratio of 10 and a dividend payout ratio of 50%, then your dividend would be 5% and half of the profit each year would be retained for re-investment in the company. Assuming your company had a price to book (Market cap to Equity) ratio of close to one, then you would expect the company equity to grow about 5% a year as well from the retained earnings. In turn, assuming the marginal returns from further investment in the company are the same as the existing ROI then next years earnings would also grow 5%. So in turn if the dividend payout ratio stays the same the dividend would also grow 5% by next year. If you only ever rely on the paid out part of the earnings, I agree you don’t care what the stock price does which is a great position to be in. You just care about the financial statements.

    If you only ever rely on financial ratios you can forget the charts completely. Without knowledge of the underlying earnings they don’t really contain any useful information. I think the market acts random when the chartists outnumber the fundamentals investors, and this is more likely to happen with stocks that don’t pay out a dividend. As for me, why would you want to own a stock that pays you nothing? The price might converge to reality but it might take years until a corporate take-over happens. In the meantime us dividend investors can keep collecting the cheques!

  72. I still stick towards growth stocks more than dividend stocks at this point. I have been leaning more towards dividend stocks lately because I want to lower the beta of my portfolio. But some companies I own like Visa do pay a dividend but a very small one today. I think in 10 years Visa will still be around and hopefully their dividend will be much more worthwhile, they are still growing at this point (which seems surprising yet when I think about it I’m not that surprised).

    I think as I get closer to where I want to be financially I’ll be switching more over to dividend stocks. I’m actually waiting for the next pullback so I can get some good discounts for the future. I wish I would have focused more on dividend stocks in the last market crash, but I still did pretty well in the recovery. I just hope in the next one I don’t get hit too hard. I have my exit strategy all setup for my most volatile investments, but I hope I re-allocate to something a little safer before another major correction.

    -Zee

  73. Thanks Passive Income Mavericks. I pulled together a list of stocks from companies I know of, and I think I found some fairly valued companies that are in different sectors. Although I am only spreading my initial investment between 3-4 companies with the funds in my ROTH, I do already have three other individual dividend stocks (XOM, F, IBM).

    As far as cash on the sideline, I can respect that, but to be honest when the market was hitting all time highs a year ago it seemed like it would happen (and it hasn’t). The companies I am looking at are all trading below a PE of 15, so if a correction comes, it probably won’t be as harsh on these stocks.

  74. Another great read. I appreciate your writings. I’ve been gradually moving my investments from mutual funds to dividend stocks. All the insights I find here have been very helpful.

    But “…you could just stay in bed and not wake up…” Isn’t that call being dead? 😉

  75. DM, what is your view on simplifying even further and just going with something like Vanguard’s Dividend Appreciation ETF (VIG) or similar? This would eliminate all the guesswork that’s stopping a lot of people from purchasing shares of individual companies, which is what’s stalling Kipp here judging by the very first comment above. It will also eliminate transaction costs to buy shares (replacing it with 0.1 expense ratio) and time needed to research/buy shares and re-balance the portfolio. Doesn’t get more passive than that really.

  76. Jason, what do you think about dividend ETFs? I mean, especially if you don’t have big sums to invest yet, you can get lot’s of those companies in one ETF (for instance Stoxx Global Select Dividend 100). Then you don’t have to worry about any company again and can even diversify with other ETFs.

  77. Just found your site recently and I really enjoy your writing style. I can relate to you in many areas.

    I wanted to ask how you mitigate the risk of companies like Radioshack Corp. (RSH). Not too long ago, they were a strong dividend player – and they just got beat by their competition. They basically crumbled and any investment into their equity was pretty much completely lost.

    I really want to like Dividend Investing – but I feel like you really need to be able to watch your companies like a hawk, and even then – historically you have a hard time beating large index funds like VTSAX.

    Care to share your mentality when it comes to this topic?

  78. Under The Money Tree,

    Haha! I’m not knocking it. If one can find a magical money tree I highly suggest to hold on tight and don’t tell anyone about it! 🙂

    Thanks for stopping by.

    Take care!

  79. Great article, just stumble upon your blog today. I am in the process of building up my dividend portfolio and hope to earn passive income like you. The majority of money is in index funds, but I will also start to buy some large cap dividend stock. Hope to see more post from your blog.

  80. Rob,

    Thank you for the readership. I’m really glad you find some value in the blog and the content. I try my best to share and inspire.

    Haha, dead is probably what you are if you’re not getting up. Although, if you’re collecting income for doing nothing you could just stay in bed and never go anywhere if you wanted to. Not the lifestyle I’d choose, but it’s cool to know that it’s possible. I think it’s when you don’t have to actually do anything that you’re most likely to find what you actually like doing the most.

    Cheers!

  81. Insourcelife,

    That’s a great question. And it’s funny you mention VIG as I specifically wrote about this very subject last year:

    https://www.dividendmantra.com/2013/04/why-i-vastly-prefer-dividend-growth/

    I wrote that article because it’s almost a daily question now. But I can sum it up as preferring the dividend growth strategy due to less fees over time, a higher portfolio-wide yield, more dividend growth, no need to sell portions of the fund, and more control over what I invest in.

    I hope that helps.

    Cheers!

  82. Scubatoad,

    Glad you found my humble little spot on the internet! 🙂

    That’s a great question you have there.

    I would basically say the risk is assumed as soon as you buy equity in a company. Before I ever initiate a position with a business I like to go through a qualitative analysis. Do they have competitive advantages? Are they a low-cost producer? Economies of scale? What’s the long-term story of the company? How do they stay relevant? Where’s the innovation? Are there switching costs involved? Brand awareness? Patents?

    These are things you must consider when investing in a company. So I would have never invested in a company like Radioshack because I don’t feel they really offer any particular competitive advantages. In addition, Radioshack didn’t exemplify any of the attributes I talk about here. And it wasn’t a dividend growth stock either. So this is really not a great example.

    However, we all get this wrong from time to time. And that’s why you diversify. If you’re wrong about a company’s economic moat and how durable it is, then you have many other companies to rely on for income growth. I know I won’t completely avoid bad investments, but I can do what’s necessary to minimize them. So far, I’ve been pretty good at it.

    And I think monitoring becomes much easier as time goes on. The initial legwork is performed when investigating a company. From there it’s checking in from time to time and making sure things are still humming.

    But this strategy isn’t for everyone. Index investing is a fine way to invest as well, as it’s low in cost and gives you wide diversification. There are drawbacks, of course, but for most people this is probably a better way to invest. If you don’t feel confident in your ability to analyze a company, or you don’t really find any enjoyment at all out of it, or you don’t really want to commit any time to analyzing businesses, then index investing might be preferable for you.

    I hope that advice helps.

    Best wishes!

  83. J,

    Glad you found the blog! 🙂

    That’s great news with what you’re doing over there. I hope you find the experience as wonderful as I have. It takes a little while for the dividend income to ramp up and start to compound, but I’m proof that consistency goes a long way, and real, passive dividend income can be built over time.

    Best regards.

  84. Looks like you need 50k invested to qualify for 30 free trades, unless you want to have 25k cash balance. Is that correct?

    Qualifying criteria:
    1) Maintain total combined balances of $25,000 or more in your Bank of America, N.A. deposit accounts: checking, savings, FDIC-insured CDs or FDIC-insured IRAs
    2) Maintain total combined balances of $25,000 or more in cash balances in your Merrill Edge® self-directed account(s): Bank Deposit Accounts sweep option with your Merrill Edge® Investment Account or Retirement Assets Savings Program (RASP) sweep with your IRA
    3) Qualify for the Platinum Privileges® program, which requires that you have an active Bank of America personal checking account and maintain at least $50,000 as a combined balance in your Bank of America deposit accounts and/or your Merrill Edge brokerage accounts.3

    (http://www.merrilledge.com/pricing -> ‘Offers & Rewards’ tab -> ‘How to qualify’ link)

    BTW the regular Merrill Edge price is $6.95 per trade

  85. James,

    Ahh, thanks for pointing that out! Looks like you’re correct, unless someone who has an account can shed some light. I didn’t read the cash portion, and to be honest have never called them or done a lot of research on this as I’m not quite ready yet to diversify brokerages.

    But from the language, it appears you’d have to either have $25k in cash in your self-directed Edge account, or qualify for the Platinum Privileges account that requires at least a $50,000 balance spread across the accounts listed. So using that criteria, and assuming a low cash balance, the free trades wouldn’t kick in until a $50k balance is reached and you’re part of their PP program. Interesting. It would take me quite a while to reach $50k with another brokerage starting from $0.

    Thanks for point that out! 🙂

    Cheers.

  86. Hi Jason,
    the German is back again…
    Thanks for another inspiring post.
    Always a pleasure to read your thoughts.
    And most of the time I can agree.
    Have a good weekend.
    rickrack

  87. Well the cash wasn’t just sitting on the side, it was in a couple of different mutual funds. But, I think once you know what you want you kind of get a “to buy” list going, just waiting for the right price. Kind of like waiting to buy an item you want on sale.

  88. rickrack,

    Glad to see you back again. 🙂

    Appreciate you continuing to read my posts. I do my best to share and inspire!

    And I hope you have a great weekend as well.

    Best wishes.

  89. You aren’t the only one my friend! I think everyone goes through a period of learning. I’ve had a few of my younger cohorts extol the beauty of penny stocks. They usually follow this up with a period of market abstinence lol. Always bring protection, where protection is knowledge!

  90. Just a personal thought but I’m somewhat curious, why do people like to bring up the nifty fifty in respect to DGI? I’ve read things like “dividend bubble” and “nifty fifty was the DGI of the time”. I see most DGI’s paying very EXPLICIT attention to valuation. Am i missing something obvious?

  91. Jason,

    I absolutely loved this post. I’m adding it to the list of links I send to people once they’re curious about DGI. You are the author of over 90% of these links 🙂 You’re a great writer and teacher and I’m always in awe at how easily you can explain powerful ideas.

    I can’t wait to see what this mysterious purchase you made is, I’m really looking forward to Sunday’s post. You probably can’t relate to this anymore without the normal work week; but I’m so happy it’s Friday. Hehe. I hope you enjoy your weekend!

    All my best,
    Ryan

  92. Jason,

    You’re finally convincing me to see things your way. You may feel like you’re beating a dead horse, but sometimes it takes a while for some of us to come around.

    When I feel it’s time to put money back into the stock market, I’ll likely be executing a dividend growth strategy as well. I believe it’s a good way to go.

    Not that I want to try to time the market, but sitting here 100% in cash, I’m not about to throw all my chips on the table when the market is at an all time high.

    With so much of my focus being on my business, I’m not sure if I’ll have the time (or energy) to dedicate to picking individual stocks like you do. What do you think of this Vanguard index fund (http://personal.vanguard.com/us/funds/snapshot?FundId=0623&FundIntExt=INT) for someone like me, who just wants the income, but doesn’t want to spend hours per week picking stocks?

    It looks like it yields 3% or so. I may do some REITs too. Not sure. Would love to hear your thoughts.

    Talk to you soon,

    Kraig

  93. Zol,

    I don’t really remember any solar companies specifically, but that was all the rage not too long ago. Could be a huge future there, but I want to see profit and the dividends to go with them. Then we’ll talk. 🙂

    Best wishes.

  94. Zol,

    I don’t think you’re missing anything. I just think people are quick to try to relate something they don’t understand to something else they don’t understand. To try and rope a whole strategy in against 50 mostly overvalued stocks from decades ago is really just comical, in my opinion. There are certainly some popular dividend growth stocks out there trading at pretty lofty valuations, like CL and ADP. And there are others that are not, like WMT, IBM, and DE. Trying to lump all stocks or one entire strategy into one little package is just nonsensical.

    Best wishes.

  95. Ryan,

    Ha! I appreciate the support and spreading the message. I hope those people you send these articles are getting some value out of them. I know if I sent some of my stuff off to my family it would just get promptly deleted. 🙂

    I’ve already got Sunday’s post all written up. This recent purchase from a couple of days ago is a bit unique for me, but I’m super excited for the prospects. I actually made another purchase earlier today that I’m also excited about. I’ll be talking about that next week.

    Trust me, I still feel elation come Friday night. I generally do a lot of my writing during the week, so the weekend is still kind of my “time off”. I guess that’s just a leftover habit from working a conventional job, but it kind of has to be that way because that’s when most other people have free time. So I still mimic a normal workweek. I actually spent like six or seven hours earlier just writing away. So I’ve got all night and all day tomorrow off. Should be fun! 🙂

    I hope you also enjoy your weekend!

    Best regards.

  96. That is a lot of writing! But I like how you can have lots of drafts going, and also put a schedule for posting so a post can go up in the morning while your still in bed :).

  97. Kraig,

    Hey, bud! Thanks for stopping by.

    That fund looks pretty solid. And you can’t go wrong with the top 10 holdings – companies like Exxon Mobil, Johnson & Johnson, and Procter & Gamble. I find it weird that a “high yield” fund only yields 2.86%, though. But that’s a pretty solid way to go. You’re basically just paying a small management fee for someone else to go out and buy common stock in these companies. Nothing wrong with that if you don’t have the time to manage a portfolio. 🙂

    Besides I can understand that most of your energy and time is better spent building your business, as that will yield bigger “dividends” for the foreseeable future!

    Hope you have a great weekend.

    Best regards.

  98. “fruit tastes better than wood”; powerful analogy; sweet! both figuratively and literally!!

  99. Monty, why does a DGI care to outperfom the S&P? And more, in just a single year?

    I can’t see that a goal of DM and other DGI bloggers/investor.

  100. Hey Mr.Mantrar

    Thank you for dedication and commitment to being a dividend growth investor. You live it and breath it and show us transparently through your website and I just wanted to say thank you.
    Keep up the good work bud and we’re with you all the Effing way.

    Cheers to us Dividend growth investors.

    p.s.. Tell me what is more thrilling than having dividend checks deposited to your account?? What a feeling!

  101. Hi Kraig,

    Dividend growth investing is an awesome way to go. Just make sure you don;t fall into the high yield trap and seek stocks that pay out unsustainable dividends. I focus on companies that have a long history of rising dividend payment and a high rate of dividend growth instead of just current high yield.

  102. I just recently stumbled upon investing in dividend-paying stocks. I wish I’d thought about it sooner but I’m just glad I’ve started. Good luck with your continued progress.

  103. Yes to clarify, I “transferred” shares from Computershare, Sharebuilder, and Scottrade OptionsFirst to meet the $50K in stocks to qualify….as I’m so addicted to buying ownership shares in great DG companies I don’t think I could ever have $25k in cash sitting around ha ha. I also had to open up a bank of america checking account. I’m currently only depositing $50 a paycheck into the BOA checking to ensure its an “active” account, to which I promptly transfer over to MerrillEdge (ME). To be honest…it took longer than expected to “qualify” for the Platinum Privileges designation (about 2 months after transfers). I had to link the BOA to ME on both sides of the businesses, call many times for my request to stay visible, etc….but it is now designated and I’m enjoying the free trades. The good thing is that the 30 trades can be allocated/shared across all my ME accounts, like the taxable one (CMA), roth, and even my kids custodian accounts. This should save so much over the next 15-20 years in frictional/transactional costs during my accumulation phase. So, DM, you have the $50k necessary to benefit right now. All you need to do is open the ME account online for free, go to their forms center and complete the account transfer form, scan it, email back to them, and wait for them to transfer over. I would recommend transferring only about $60k worth of stocks or so and keep your Scottrade account open. This will allow you to enjoy the free trades, get use to the platform, and have access to all your cost basis information from Scottrade available. Again…you can transfer shares over without selling, so you loose nothing and do not trigger a taxable event. The longer than expected process was definitely worth it!

    Cheers,

    Jason

  104. Great article! Especially for a dividend newbie like myself. You laid out your reasoning for preferring dividend investing very clearly and this whole site has been very helpful. Can’t wait to dig in more!

  105. Jason,

    CapitalOne offers a ShareBuider program that has very low fees and automatic investing of small dollar amounts. COSTCO members get extra discounts. Maybe something you might be interested in doing some research on.

    Chris

  106. Tyler Tran,

    Thank you for the very kind words there. I really appreciate the support. The thought that I’m helping people out there makes this all worth it for me. 🙂

    There’s really nothing I like more than seeing fresh dividends hit my account, but receiving a dividend raise is a close second!

    Have a great weekend.

    Cheers!

  107. Dear Dividend,

    Better lat than never. I also wish I would have started even earlier. If I would have started in my early 20s I have no doubt I’d already be financially independent right now. It’s a shame, but I learned from my mistakes. They were expensive, however. 🙂

    Appreciate you stopping by. Now that you’re on the right track I’m confident you’ll see your passive income steadily increase. Keep it up!

    Best wishes.

  108. Jason,

    Thanks for sharing that. Once I read about the requirements I was confident you had the $50k and PP account. Makes sense.

    And if your accumulation phase is indeed 15-20 years then saving on fees, even if they’re small, adds up big time. Those fees are basically a sunk cost.

    My issue is that I don’t personally want a Bank of America checking account nor do I want to transfer assets out of Scottrade. I’ve really enjoyed my service with Scottrade. Although, this program might make sense for my second brokerage account. But it looks like I’d have to have $1,200 sitting around in the checking account or pay $12/monthly. That $1,200 could only generate $3.50 per month in dividends at 3.5%, so it’s not a big sacrifice. So I’d be paying $3.50 for unlimited monthly trades, which is a pretty nice price tag.

    Thanks for the food for thought! 🙂

    Best regards.

  109. Syed,

    Thank you! Glad you enjoyed the post. Hope you found some value in it. 🙂

    And definitely check out the blog. You may find something else you like as well.

    Thanks for stopping by!

    Take care.

  110. Chris_F,

    Thanks for sharing that!

    I’ve looked into Sharebuilder before, and the platform is really interesting. I personally don’t like the idea of Tuesday batch buys, but I can see how it works great for others. I would say that platform works especially well if you buy really small lots because your available free capital for investing is small.

    Although, I had a bad experience with CapitalOne many years ago and I’ve been kind of bitter ever since. So that also keeps me away, even if I liked the program more.

    But $4 for a bunch of small lots is really attractive for those with smaller amounts of capital. I typically invest at least $1,000 per transaction, and usually aim for at least $1,400 when I can. So that spreads out the $7 I pay.

    Thanks for stopping by and sharing!

    Cheers.

  111. Great article Jason! My favorite part is “Act as Filter”. I think it gives an idea for beginner’s investor that there are actually not as many good stocks as they think, and after some research anyone can pick their favorites and just keep trucking them.

  112. Happy,

    I’m with you. There are thousands of stocks out there, and that can be overwhelming to a beginner. Filtering that down into just a few hundred or so makes the process much easier right from the get go. And then finding out that among these few hundred are many businesses you’ve already heard of kind has this calming effect.

    Thanks for stopping by!

    Cheers.

  113. Great article Jason. I’m looking forward to your Sunday article. I’m wondering if you finally pulled the trigger on Visa. I bought JPM last week and am thinking about BAC. Tim McA can’t stop talking about it.

  114. i stop reading when another blogger starts saying that dividend income is passive. this pervasive thought seem to put it that you don’t have to spend time looking at your stocks, and if you are holding 40 stocks, you are not risk managing. You probably don’t understand what you own well enough and have not enough conviction.

    The sooner you realize this the better.

  115. DD,

    I just posted the newest article. And I did indeed initiate a position with Visa. 🙂

    I also initiated a position with another company on Friday, and I’ll be talking about that later in the week. Stay tuned!

    Cheers.

  116. Kyith,

    If you compare it to rental properties, it is more passive. When you do not have a property manager you have to do things such as mow the law and fix things right away. With dividend investing, most of the work is done up front in doing the research. It is true that you have to monitor the stocks, listen to conference calls, and read annual and quarterly reports.

    Dividend Mantra’s post which he calls “Recent Buys” are in detail why he buys the position and the numbers he puts out in them.. If order to know these numbers you have to research.

  117. Another great post. Liked the tree analogy. It isn’t the first time hearing about it but I think we lays forget the picture. And I like the Redwood shade analogy as well. Bigger a tree grow, bigger the shade becomes. 🙂 Currently I have 18 varieties of fruit and they keep growing (and didn’t even realize how fast it has grown) and I can say I am fully committed!!! Since I came across DGI’s and your blog not too long ago, I’ve been digesting whatever I can, and I always keep what to avoid in mind to minimize the steep learning curve, if you will. I’ve read some books recommended by both of you guys as well, not YMOYL yet but soon (as I am typing this, I just put it on hold at my branch of the the public library) and some of them were about index investing. Since you said you looked into it before committing into DGI for FI, I was wondering if you could share your thoughts, since you quoted John Bogle in your post today. I’ve been sort of looking at Vangard Target a Retirement Funds (the more I look into it, the more of ‘Vangard’ recommendations I come across. I know that you also discussed about allocations in terms of equity versus bond too but I’ve also seen and read else that it is also suggested as a solid passive income generator along with DGI in the long run, especially considering the power of compounding. You just buy and hold almost for good. I don’t know if this is relevant to this particular question but I’ve also looking into Roth IRA, my company doesn’t offer 401k, with a benefit of accessing the funds at any time regardless of retirement age. Of course it’ll be all DGI based but sort of play a role of emergency funds, if you will, because like you pointed out, I do not wish to cut the branches. What institution or institutions offer the best or if I can go with Wells Fargo, my bank. I’m only asking this because we always consider what advantages we get in terms of what brokers we choose, Scottrade vs. ME. (Mine is ShareBuilder and Loyal3.) What are your thoughts on this? Thanks!

  118. Rookie,

    Well, I discussed index investing compared to dividend growth investing (and why I prefer DGI) here:

    https://www.dividendmantra.com/2013/04/why-i-vastly-prefer-dividend-growth/

    Overall, I think index investing is a great way to invest, and preferable for most people. That’s simply because the learning curve isn’t bad, the fees are low, and the time commitment is light. However, I think dividend growth investing is superior for those so inclined.

    As far as institutions go, I like Scottrade. But many use Sharebuilder and have been very happy. I honestly don’t know what Wells Fargo offers as I’ve never personally looked into it, but I do know what WF offers great customer service and pretty strong products. I would contact them and see what they can do for you. I’m sure there’s something they can work out.

    Best of luck as you continue down your journey. And I’m confident you’ll like YMOYL. That’s just a great book, in my opinion.

    Cheers!

  119. Thanks for pointing me in the right direction. Read it, understood your points and agree with them. Thank you so much, DM!

    And I am looking forward to reading YMOYL!

  120. Thanks for the great article! I’m also a firm believer in dividend growth investing as I’ve watched my passive dividend income grow over the past few years. I can’t wait until I can one day reach that “crossover point” where my dividend income exceeds my monthly expenses!

    Good luck on your journey to financial independence!

  121. MRTWAF,

    Thanks for stopping by. 🙂

    Watching passive dividend income rise against expenses is just wonderful, right? It’s like you can actually see your ship coming in. It’s tangible freedom one dividend at a time.

    I also can’t wait to hit that crossover point. I’m not quite sure yet how I’ll celebrate but I’ll definitely commemorate it. 🙂

    Good luck on your journey as well. To our success!

    Cheers.

  122. All of those are reasons why I chose this strategy as well. Plus being able to keep that machine going after I am gone will benefit all of my heirs. My goal is to be FI but also give my kids a head start so they can do what they love vs. do what pays the bills.

  123. That is the exact same reasons i am doing it,but i hope i get many years of enjoying the spoils first. Good luck in your pursuit of your goals and many years of enjoying them.

  124. DFG,

    Sounds like a great goal there. I won’t have any children, but I would love to be able to leave behind some kind of legacy to family and charity. 🙂

    Keep reaching for FI, my friend!

    Cheers.

  125. Pingback: Dividend Growth Investing | Jeremy M. Day
  126. Thank you for the article. I’m stuck on the fact you must have $500k+ to play around with dividends at such a relatively young age! I have $8k:). I love the idea of letting the money do the work and have the same goal, but, I’m not sure I have enough to reach this goal while still young enough to enjoy it. I am 31 with a below average engineer’s salary and below average patience!

  127. JSW,

    I sense a defeatist attitude there. I don’t (and never did) make a lot of money either. It’s not what you make, but what you’re able to keep. And what you’re able to do with that money you keep. Being 31 years old with an engineer salary (even one that’s below average) puts you in an excellent position.

    You may want to check out these posts:

    https://www.dividendmantra.com/2014/09/using-extreme-frugality-in-the-beginning-to-get-things-rolling/

    https://www.dividendmantra.com/2014/07/saving-more-is-more-effective-than-earning-more/

    https://www.dividendmantra.com/2014/05/if-i-were-starting-all-over-again/

    https://www.dividendmantra.com/2014/02/the-power-of-pennies/

    Cheers!

  128. Hello Mr. Dividend Mantra,

    I am hoping for some advice on what to do next in my financial journey. I currently have a couple of bank accounts and am interested in investing in dividend stocks. I opened up a Bank of America Money Market account earlier this year, but I know that I can do more with my money. How should I start with dividend investing?

    Thank you,

    CT Okolo

  129. Thanks for the great blog. I have begun to implement many of your ideas into my life and have made great strides towards FI. I have a few questions I hope you can answer for me:
    1. Is the typical 4% retirement withdrawal rate based on the fairly conservative assumption of a total annual return of 7% (based on historical market returns?) minus 3% for inflation?
    2. When a stock’s share price drops significantly, as long as you don’t see a significant change in fundamentals, are you typically looking at this as an opportunity to increase your position?
    3. I am in a position right now where I have saved enough money to possibly reach FI now at age 42 and due to concerns of a fairly frothy/top heavy market at this time, am hesitant to invest all of my money in stocks. I currently have the majority of my money in a low cost long term bond fund with Vanguard that returns about 5% per year historically and have been slowly purchasing dividend stocks that currently make up about 15% of my portfolio. My resume is weak and I do not have a formal education so my income visibility is quite low. That being said, if I lose a large portion of my current savings in the market it would be very difficult for me to replenish it through work. Do you recommend I average in slowly over time or, based on the fact that one cannot time the markets, just bite the bullet and jump in to a 100% equity/dividend portfolio? I’m just concerned with taking on a lot of market risk being this close to potential ER.
    Thanks in advance for your response.

    Best,
    Nick

  130. Nick,

    Thanks for dropping by.

    I’ll do my best with your questions, some of which I’ve answered with articles.

    1. You can read my thoughts on the 4% SWR here:

    https://www.dividendmantra.com/2014/09/the-4-rule-examined/

    As far as the study goes, it relies on actual data from 1926 through 2009. They use large-cap stocks, high-grade corporate bonds, and CPI values through that period. As far as I’m aware, the long-term total return of the broader stock market is somewhere around 7% annualized.

    You can view the updated study here:

    http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx

    2. Correct. If the fundamentals are still sound, a pullback is an opportunity to purchase more. It’s along the same lines of anything else in life. If you’re accumulating houses and houses drop by 20% in price, you’d be excited to buy more (assuming the houses you’re buying aren’t sinking into the ground). For some reason, people lose this association with stocks.

    3. That’s a tough question and a rather personal call. I can tell you that I’d personally feel more comfortable averaging in. Not necessarily because of the broader stock market’s position here (it could easily rise another 20% or fall 20%), but rather because I don’t know if I could find enough attractively valued stocks to deploy, say, $100k all at once. That would have been a lot easier two or three years ago. Not so much now.

    I can tell you that Vanguard did a study on it and concluded you’re better off investing the lump sum:

    http://pressroom.vanguard.com/content/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

    I hope those answers help. Wish you much luck. The good news is that you’re even in a position to reach financial independence at 42 years old. You’re obviously in rare company. The odds of you doing something completely wrong are quite low if you stick to the mindset that got you there in the first place. Interestingly, you can see the failure rates in the Trinity Study using bonds. Keep that in mind.

    Best regards!

  131. “You’re a business owner, not a stock trader.”

    Indeed !

    And that my friends, is the sentence of the year, every year.
    He who shall be smart enough to understand the meaning of it, will prevail.

    Enough said.

    Jason, this sentence is your pearl so far in my reading sessions, so much is embedded in these 6 words.

  132. Yossi,

    Thanks so much. Glad you found value in the article generally and that sentence specifically. That’s how I approach investing day in and out. I’ve never once thought of myself as someone who trades stocks, but rather as a businessman who owns small slices of many wonderful businesses. It’s really a paradigm shift.

    Thanks for dropping by!

    Best wishes.

Leave a Reply