I invest in dividend paying stocks in order to generate a sufficient income stream that will meet and exceed my expenses in retirement. “Retirement” to me is the point where my dividend income exceeds my annual expenses by 1.5 times, which means that I no longer have to work for money. In order to get there I am following several simple, but crucial, principles [which I would like to share with you]. Words: 830
So says the Dividend Growth Investor (www.dividendgrowthinvestor.com) in edited excerpts from the original article*.
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
The article goes on to say, in part:
Principle #1: Spend Less Than What You Earn
In addition [to saving aggressively and] consistently… every month I designate any bonus or raise received to my dividend growth portfolio [and am always] looking for additional income opportunities [given] my skill set. By investing as much as possible, I can grow my portfolio and the income stream it produces very quickly… and my regular savings [enable me] to consistently add to my portfolio using dollar cost averaging over time into positions that are attractively priced, creating another layer of safety.
Principle #2: Invest Conservatively
I invest my money as if I would lose my job and I would have to depend on my portfolio income for my sole source of survival. As a result, I do not chase hot stocks or try to outsmart the market through frequent trading or market timing. I have designed a simple strategy which fits my personality and which works for me…
Principle #3: Design an Investment Strategy and Stick With It
My strategy entails:
- Stocks that have a 10 year record of consistent dividend raises,
- P/E ratios of less than 20,
- Dividend payout ratios of less than 60%,
- For MLPs, REITs and Utilities I evaluate each opportunity on an individual basis
- Dividend yield exceeding 2.50%, although I do change this requirement depending on the dividend yield on the S&P 500,
- Quality characteristics such as:
- wide moat,
- strong competitive advantages,
- strong brand names,
- rising earnings,
- decreasing number of shares,
Valuation is paramount in my investment decision. I typically expect that the distributions from my dividend portfolio will grow organically by about 6% per year. In comparison, dividends on Dow Jones Industrials Average grew by over 5% per year between 1920 and 2005. The rising dividend stream will maintain purchasing power of my income stream by protecting it from inflation…
Principle #4: Sell Underperforming Shares
I typically sell dividend stocks only after three events have occurred. One of these events includes dividend cuts. If a company whose stock I own lowers or eliminates dividend payment, I immediately sell and reinvest the proceeds into an investment from a similar sector that is priced attractively…
Principle #5: Portfolio Diversification
I try to maintain a diversified income portfolio of over 40 individual securities. The portfolio is not equally weighted, as it has been built over a long period of time. It includes a fair amount of underweight positions which were accumulated when they were attractively valued but are no longer fairly valued. The reason behind diversification is to ensure that the income stream is not severely affected when one or two of the stocks cut distributions.
A dividend cut in a portfolio of less than 10 stocks will severely affect the income stream. A dividend cut in a portfolio of over 30 stocks will not affect the dividend income. In an equally weighted portfolio, even if the dividend is completely eliminated in one or two components, the total income can still grow if the other components grow distributions and if the sold stocks are replaced strategically.
Principle #6: Strategically Reinvesting Dividends
While I plan that my dividend growth portfolio will generate organic dividend growth of 6% per year, by reinvesting dividends, I can generate a much higher total growth in portfolio distribution income over time. Basically I am turbocharging my total dividend income by purchasing shares which increase dividend payments, then reinvesting these dividend payments and also adding new capital to the portfolio every single month. I typically wait for the amount of dividends and the amount of new capital to reach $1000 before I purchase a new or additional position in a given company. I do not automatically reinvest dividends, because I do not want to purchase additional shares in a company that [is] overvalued.
By saving money, investing it in blue chip dividend growth stocks and reinvesting dividends and new capital, I plan to generate enough dividends to make me financially independent in a few short years without having to endure a lower standard of living.
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