This blog is intended for educational purposes only. None of these posts are meant to give legal or financial advice. If you need advice you should consult an appropriate professional.

Thursday, September 12, 2013

Dividend growth investing

We all should aim to build some income that doesn't depend on us clocking in and out everyday.  Traditional defined benefit pensions are disappearing like the horse and buggy, and let's face it social security is not in the best shape either.  That leaves your own ability to save and accumulate wealth.  So we're on our own when it comes to retirement.  Scary isn't it?  Yes!  But I know a secret.  Actually it's not a secret.  It's called dividend growth investing.  It consists of buying shares in companies that pay an ever increasing stream of dividend income.  The four main ways to grow your money through dividend growth investing are:  depositing new money, reinvesting dividends, increasing dividends, and capital gains.

Depositing new money into your investment account is the fastest and most sure way to increase your balance.  This requires having a stable, consistent, adequate income to have a built in surplus where wealth accumulation is possible.  You have to structure your life where there's always extra to put to work.  A tall order for sure.  If possible it's best to invest money every month regardless of what the stock market is doing.  It's known as dollar cost averaging.  You're not doing this for the value of the stock but for the dividends, so don't focus so much on the up and down of the stock market. 

Reinvesting dividends is the second way to build wealth with dividend growth investing.  Your goal is to invest in companies that have consistently raised their dividends and should for the foreseeable future.  Something like 25 or more years of dividend raises is excellent.  Some brokerages will reinvest dividends for free.  You can also participate through a dividend reinvestment plan or DRIP directly through the company's transfer agent or even sometimes directly with the company.  I use a taxable brokerage and hold all my stocks in street name.  This means the stocks are not directly in my name but still belong to me.  This simplifies tax statements with one statement instead of 20 or so depending on how many companies you hold.

Increasing dividends is the third way you can make money with dividend growth investing.  As I said above, find companies that have raised their dividends for 25 or more years in a row.  This narrows the playing field a lot.  Any company that is able to do this is doing something right!  Usually the companies that raise their dividends that long also raise them more than the official rate of inflation.  I bet this is better than the raise you get at work.  This will raise your income even if you deposit no new money or don't reinvest dividends.  Usually the dividend increase happens once a year at about the same time.

Fourth and finally capital gains are the gravy when it comes to dividend growth investing.  Remember you're not investing for capital gains like the majority of people.  This isn't about finding the next lottery type penny stock.  You're focused totally on the income those puppies throw off to pay your bills.  That's what I like about a taxable brokerage account as opposed to a 401k or IRA.  You can use the money now with no penalties or strings attached.  A capital gain is something going up in value.  You buy something for 5, it goes to 12, your capital gain is 7.  Look at capital gains as a nice bonus.  This mindset should help you care much less about drops in the market.  In fact drops could very well be a buying opportunity.

To sum up, the four ways to make money with dividend growth investing are:  new money, dividend reinvestment, dividend increases, and capital gains.  For the average person it's the best thing I've found going.  Remember it's a way to buy a piece of the capitalist machine.  Aim to pay one bill at a time with dividend growth investing.  It's OK to start small!  There are so many ways to lose in this system.  This is one way to win!

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