Dividend Growth Investing: An Introduction To Creating Wealth

Includes: CL, JNJ, KMB, KO, PG
by: David Crosetti


I like to invest in Dividend Growth Stocks.

That does not preclude me from investing in stocks that do not pay a dividend.

Since I consider myself a value investor, fundamentals matter in any purchase decision that I make.

While some people are perfectly content with Index investing or "passive" investing, I prefer a more active role in my own investment practices.


One of the things that I like about being a Dividend Growth Investor is that there is an almost unlimited universe of dividend paying stocks that I can add to my portfolio.

Dividend stocks come in all flavors and sizes. There are large-caps, mid-caps, and small-cap dividend payers. There are growth stocks, value stocks, international stocks, and emerging market stocks. There's something for everyone in the universe of dividend paying stocks.

In my opinion, garnered from my own personal experience, Dividend Growth Investing is different from some of the other strategies out there. For one thing, DGI is not a sprint. Instead, DGI is more like a marathon. It involves preparation, precision, patience, and perseverance. Instead of racing to the finish line, I know that I am not in any particular hurry. Slow and steady rules the day.

Even more to the point as to why I enjoy DGI is that the strategy causes me to focus on being an "investor" as opposed to a "trader." Some of my own guidelines to the strategy are:

  1. Purchase companies that are priced at a value to intrinsic net worth.
  2. Look for companies that have a history of paying dividends.
  3. Look for companies that have a history of increasing those dividends annually.
  4. Look for companies that have the earnings power to continue increasing dividends.
  5. View yourself as a "partner" in that business with the expectation of sharing profits.
  6. Make it a practice to reinvest dividends for the element of "compounding."
  7. Don't sell unless something fundamentally changes within the business model.
  8. Never touch principal, but instead use dividend income and leave the stock alone

What I Believe:

When I purchase stock in a given company, I view my share purchase as an act of my becoming a "partner" in the underlying business. I look at the shares that I own as being a representative part of the business. I might end up owning an incredibly small part of that business, but nonetheless, I am now an owner of that small part of business, as a shareholder.

As a result, I don't worry as much about the day to day fluctuation in the price of my stock, as it is reported online at my brokerage account. Instead, I look more to the operational side of the business. What new products are they introducing? How are they creating a competitive advantage over other companies in the same business? How well does the company act as a steward of the underlying business?

While I understand that my involvement in the ownership of the company is at best, a passive relationship, I still have to understand that as a shareholder, I've entered into that partnership agreement, and as a DGI, that partnership comes with the expectation of sharing in the profits of that company, through dividends, in much the same way that I would expect compensation for my part as an active participant in a given business.

Some People Just Don't Like Dividends:

Now I realize that there are many people out there who just do not like dividends or companies that pay dividends. For the most part, the consensus belief for the anti-dividend crowd is that dividends do not enhance shareholder value and the best use of earnings is to plow those earnings back into the company and not to shareholders.

Now, we can argue about this all day. That's not the point here. If you don't like dividends and think that they should not be paid to shareholders, then I would suggest that perhaps you might want to just stop reading this article.

This author is not ready to enter into an argument over the "good, bad, or ugly" of dividends. Instead, my goal here is to share why I invest in stocks that pay dividends and why I do. No argument is going to change the fact that there are companies that pay dividends, have paid those dividends for long periods of time, have grown those dividends annually, and have the earnings power to continue increasing dividends moving forward.

How you personally feel about dividends is not going to change the fact that there are companies that meet the standard that I've just shared above. I choose to use those companies as the centerpiece of my investment strategy. You might choose to ignore them. That's fine by me. It's your money and you are free to do with it what you choose.

Things You Should Know:

My intentions with this article is to create a series of articles, relative to DGI strategies and practices that may be of interest to younger investors; people who have been more active traders and are looking at alternatives to their investment strategies; to perhaps clear up some misconceptions about DGI.

I am not a professional investor nor am I a financial advisor. I am a retail investor. The guy who lives next door to you that drives an old pick-up truck and is always willing to lend you one of my tools for some project you have going on at your house.

I am not an academic. I write about real portfolios with real money. I report the good, the bad the ugly. Suffice to say, since early 2009, let's face it, things have been relatively good. The markets are up and for those who began investing (not trading) in 2009, you should have done pretty well up to now.

The problem that I see is that there are a lot of people who did not get on the train back in 2009 and many of these people are just starting to come on board. Now is a risky time in the market. What goes up, must come down, the cliché says.

But, if there were a way for you to minimize the ups and downs of the stock market and have a long term plan with what would appear to be a very unrealistic and contrary investment strategy, would you be at least willing to investigate? You don't have to buy all in on this. Just consider what we are going to talk about and instead of being smarter than me, please try to just maintain an inquisitive mind.

Let's Begin With A Story:

I began investing in dividend paying stocks back in 1984. I worked for Coca-Cola (NYSE:KO) and we could purchase KO stock as part of our 401k plan. So, I did. I had friends that worked for other companies and they were as excited about the opportunities at their companies as I was about Coca-Cola. So we all started buying stock in each other's companies. I bought Johnson and Johnson (NYSE:JNJ), Colgate Palmolive (NYSE:CL), Kimberly Clark (NYSE:KMB) and Procter and Gamble (NYSE:PG).

I've held those other 4 companies since 1986 and have never sold a single share of stock. I've always reinvested dividends and the results have been spectacular. All of these companies are part of what is known as the Dividend Champions. These are companies that have increased dividends annually for at least 25 years in a row. Each of these companies has done exactly that.

So Let's Take A Look At How Things Have Gone:

The results for the initial construction of the portfolio since inception looks like this:

What I find interesting here, is the annualized return for these 5 companies over the period examined. There were stock splits for each of these companies along the way and remember, dividends were reinvested, so the holdings of each company within my own portfolio is large.

But, the position size is not as important as the annualized return rates and the actual cost basis for the shares owned, even with those dividends being reinvested.

I am continuously amazed at stories about people who invested in dividend stocks at some time in their lives and those people who continued to own those same shares for many years and end up with substantial portfolios in the end.

Since the stocks we look at are primarily companies that have grown their dividends annually, the question that seems to be asked over and over again is "why do dividends matter?"

Yield is a function of price paid relative to the actual dividend amount. The reason that KO's dividend is not 10% or 15% today is because as dividends increase, guess what? So do stock prices for the companies paying those dividends.

Will that continue forever? Who knows. I do know that as part of my own investment discipline, when a company freezes, reduces, or eliminates a dividend, I usually am going to sell the stock. Now, that is not a recommendation for you or anyone else. It's just something that I tend to do.

By the same token, in every portfolio, there are going to be stocks that perform well and stocks that do not. As an active portfolio manager, you have to make decisions as to "buy, sell, or hold" and that is something that a lot of investors just aren't comfortable with.


While I am not recommending any strategy of investing, nor am I suggesting that these particular stocks mentioned in the article are stocks that you should own, I would suggest that perhaps you investigate DGI.

My goal at beginning this investment strategy was to create a portfolio that would provide me with an income in retirement so that I would not have to rely on Social Security until I actually could benefit from Social Security at age 70.

While I can acknowledge the academic side to investing in stocks other than DG stocks, nonetheless, the strategy has provided me with a very comfortable retirement situation and allows me to be in the position of never having to sell a single share of stock in order to meet my retirement income needs.

Disclosure: I am long KO, PG, CL, KMB, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.