What Are Your Dividend Investment Goals?

Great investors have goals and strategies are only the tools that help them accomplish their targets. My goal is to generate a rising stream of dividend income, which would allow me to leave the rat race and spend my time doing worthwhile things like education and charity and self-development.

By focusing on dividend growth, I am trying to pick the stocks, which have solid competitive advantages, whose revenues are relatively recession proof but could still grow earnings by innovation, acquisitions, and buybacks. Historical inflation rates have been around 3% for the US over the past one century. Thus, by focusing on companies, which have a long history of dividend increases of over 3%, I would create an inflation proof source of income.

In addition to that, if my stock picks raise dividends faster than the rate of inflation, I would be able to achieve very good yields on cost in the process. A company, which yields only 3% or 4%, might be scoffed at by yield chasing gurus, who wouldn’t even consider a stock unless it yields 8% or 10%. Those yield chasers might get the 10% yield now, but the cost of dividend cuts or no dividend increases makes chasing high yielding stocks a dangerous exercise with negative effects on wealth building.

At the same time a company that yields only 3% or 4% now, but grows its dividend payments at 12% annually, could generate a yield on cost of 6% to 8% in 6 years and yields on cost of 12% to 16% in 12 years. These companies exist in the market. It only takes an attentive dividend investor to uncover them. Examples of such companies are

Johnson & Johnson (JNJ) has regularly hiked dividends for 47 years in a row. The ten-year average dividend growth for the producer of Neutrogena, Tylenol and Remicade is an impressive 13.30% annually. (analysis)

Procter & Gamble (PG) has rewarded shareholders with dividend raises for 53 consecutive years. This consumer good juggernaut has managed to increase distributions at a rate of 10.70% annually over the past decade. (analysis)

Pepsi Co (PEP) has increased its dividends for 37 consecutive years. The producer of Pepsi Cola, Mountain Dew, Lays and Doritos has delivered a 12.80% average dividend growth annually over the past decade. (analysis)

McDonald’ s (MCD) has increased its dividends for 32 consecutive years. The worlds largest fast food chain has boosted dividends by an average of 27.30%/year over the past decade. (analysis)

I believe that even in 20 years people would still have a need to eat, drink, shower, shave and take pills. I would bet that even in 20 years people would still shop at McDonald’s – if not for their burgers then for the salads or whatever food sells the best.

Over time a portfolio of carefully selected dividend growth stocks could not only deliver a consistently increasing stream of dividend income which increases faster than inflation, but could also deliver outstanding total returns. Over the past fifteen, ten, five, three or one years, the dividend achievers index has outperformed the S&P 500. (source Mergent's)

The dividend achievers index consists of US stocks traded on NYSE, NASDAQ or AMEX, which have increased annual regular dividends for at least the past ten consecutive years. This index is a great shopping list for novice dividend investors. Even Peter Lynch, the famous manager of the Fidelity Magellan Fund, which outperformed the S&P 500 by a significant margin in the 1980’s, said : "The Dividend Achievers Handbook is one of my favorite bedside thrillers. Here's a simple way to succeed in Wall Street: Buy the stocks on Mergent's list and stick with them as long as they stay on the list"

As a dividend growth investor my primary objective is growth in dividend income without losing too much of my capital in the process. Capital appreciation is second of importance. I believe that if my portfolio generates enough dividend income for me, I would not have to rely on selling 4% of my portfolio at depressed prices in order to live off my investments.

Disclosure: Long MCD, JNJ, PG and PEP

Comments

[mbkelly75]

Well said. I am long all four of the stocks in this article and have been for several decades or more and you are exactly right in your premise.
Two links that will help make your point and help find these stocks are:
This article really helps show the benefit of dividend growth rate over time and how it compares with the dividend percentage itself:
www.sensiblestocks.com...

This is a combined list of all four major lists of long-term dividend payers with the duplicates taken out and updated more often than the original lists:
dividendsvalue.com/ana.../

I appreciate your work here and the quality of your writing. Thanks again.

2009 Nov 18 10:09 AM

[slam stocks]

Glad there are others out there with more realistic expectations. I'm doing exactly the same investment style with 3 of your 4 stocks. Without the risk, I've already achieved a 35% return for 2009 with these holdings. The only change would be ABT instead of JNJ, but a very simple and easy to understand article.

Excellent job!!!

2009 Nov 18 10:18 AM

[mbkelly75]

I am too much of a bottom-fisher to have been caught by high PEs. Graham and others have taught me too much over the decades to fall for that one. You really can learn a lot from history if you study it. :)


On Nov 18 11:17 AM bobbybutte wrote:

> as a person who has become fianncially independent SOLELY by allocating
> capital let me add a few things
>
> You are correct if you do this correctly you will not need to sell
> any of your portfolio. That is important
>
> The key once you pick the stocks is entry point
>
> Many who tried to do this in late 90s like me entered stocks with
> too high of PES
>
> I did most of my picks between november and april but there are still
> some good ones out there
>
> Dont be obsessed with a stock constantly increasing their dividend
> every year
>
> If you were you missed one of the greatest investments of teh past
> decade
>
> Instead study 5 and 10 year intervals
>
>
> Just find companies who you believe have alarge moat
>
> Many peopel chose safe stocks like T GE C JPM etc and got smushed
>
>
> Investing is 50% art ( instinct) and 50% science( numbers formulas)
>
>
> Stay focused and keep on your journey
>
> You will achieve financial independence I know because it happened
> to me.peace

2009 Nov 18 12:20 PM

[Rainmaker986]

I too concur that this strategy works. I am financially independent because of it and doing it for 30 years. I hit all the bumps in the road along the way too. GE, BAC and USB got me as well. I have 35 or so others that took the sting out of it. You will get hit a few times but keep your focus and try to learn from each setback. The time spent building my portfolio were far more fulfilling that the time I spent working a job busting my chops for people who cared nothing for me. I take my hat off to people like DGI, Dividend Tree and others who take the time to share their knowledge with us.

Long: OXY, BMY, GPC, KO, PEP, JNJ, CVX, BAC, USB, GE, PG, KFT, SJM, HNZ, SYY, NNN, D, SO, ED and some lesser knowns.

2009 Nov 18 08:32 PM

[David Van Knapp]

Congratulations to everyone who has discovered the benefits and rewards of a dividend stock strategy. From the comments, there are variations on the theme, but the central tenets of the strategy are pretty consistent: Good initial yield; sound companies; consistent dividend increases; buy at the right price; don't pay much attention to price after that; and re-invest the dividends (if you don't need the cash immediately).

To those who got caught by the likes of GE and USB, let me just suggest that with a little attention, most dividend cuts can be predicted before they happen. I know that not everybody has the time to research their holdings all the time, but I recommend semi-annual Portfolio Reviews. The idea is to make each stock "prove" that it still deserves a place in your portfolio. GE's dividend cut, for example, was announced several months in advance by GE's own press release. So successful dividend investing is not buy-and-hold, it's buy-and-watch, or buy-and-check-in-occas... You can perform a decent portfolio review on a 10-15 stock portfolio in a couple of hours. It's worth it. Here's an example of one: sensiblestocks.com...

I keep seeing the same names on these articles and comments. There seems to be a little sub-community here on SA of people who have discovered the dividend phenomenon (I don't want to call it a secret, it's right there in plain sight). Read the conspiracy and market-is-rigged articles for comic relief, but for consistent long-term investment success, it's hard to beat dividend investing.

2009 Nov 19 09:55 AM

[Brad Castro]

Another solid article and great collection of comments.

I'm a dividend growth investor myself, but I try to accelerate the process a bit by employing certain conservative option strategies to lower my cost basis over time.

A seemingly strange blend of approaches, but it works well for me.

But the most important factor is always the quality of the business itself.

2009 Nov 19 10:11 AM

[Stargazer]

When I first started reading information available on S.A., I wasn't sure what I would get out of it. I hoped at the time a few pieces of helpful information would come my way once in a while.

Dividend Growth Investor was one of the first authors I started reading on here. Nearly all his articles have been helpful to me in some way. I've said it before (and I will say it again), but thank you D.G.I. for the time you put into your articles and the sharing of knowledge within them.

I still consider myself a novice at dividend investing. Probably will for many years, and that is alright. I've made my share of mistakes and still have a lot to learn. However, I must say that when those dividends are deposited into my accounts every month, it sure does feel good to think I am doing some right in my life for a change.

Long: JNJ, MCD, PG.

2009 Nov 19 10:17 AM

[Berninvestor]

I agree with all of the comments above. I've benefited from Dividends For Life as well as The Growth Investor, and I'm fortunate for discovering SeekingAlpha. Thank you very much!

2009 Nov 19 10:39 AM

[GimliJan]

Bravo!
Excellent easy to understand article. Great comments with additional information for performing your own "due diligence".
David is right. We seem to be "flocking" to DGI, Dividend Tree, Dividends for Life, and others that have commented here. I am learning and these articles are helping me do that with less pain from my investments than if I was alone.
Long MSFT, INTC, KMP, EPD, PGH, PVX, DUK, GLW

2009 Nov 19 11:54 AM

[samadams]

Just buy Phillip Morris, and forget about it for a couple of decades. I backed up the truck at 33. As a world traveler I can tell you their business is booming.
If you hate the business they're in buy Exxon, Coke or Pepsi or McDonalds. MCD has compounded at 15% for over 30 years.
good luck

2009 Nov 19 09:00 PM

[KyBec]

I'm long MCD, PEP, KO, PM, MO, MSFT, JNJ, ABT, PG, MMM, EMR, CVX, XOM, WMT for the same reasons. In dividend growth investing purchase price is everything.

2009 Nov 20 08:32 AM

[consumeronstrike]

I'm really enamored with this style of investing and got a real boost from this wonderful crash. Darn unsustainable crash...if only I'd had more time...
Anyway I was just wondering...folks who've been doing this for decades, as some of you have...I'd like to hear what some of your best yields on cost are! Anyone want to tell us? MBKelly75? I bet you have some amazing yields on cost. I hope to concentrate more on these kinds of companies in the future because the way I'm investing now is not the way I want to keep investing for the long term. I don't make much money and I'm trying to increase my current income by investing right now, but as I build up my income some I want to gradually shift over to a more "dividend growth" oriented style. Right now I'm long AEE, AEP, MO, OKE, PEP, PGN, PNW, SCG, and WIN. First initiated most of these in Feb, Mar, Apr, May, and June. I've got some real good yields in all of these because of when I got in. But eventually I want more companies like PG, CVX, and others that I believe can be counted on for faster, most likely dependablr dividend growth. I also believe the folks that post after these types of articles are the smartest. Rather than lamenting the crash, I wish I could've had a lot more of it. I bet all of you made good use of it too.

2009 Nov 27 07:20 PM