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Long only, dividend growth investing
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Summary

  • Dividend growth investing is about creating consistent income that you can rely on at some point in the future that will grow with every passing year.
  • There are a lot of distractions in the marketplace and it’s easy for investors to lose focus on what works.
  • Dividend growth investing can be a simple, rewarding approach to creating long lasting wealth and income.

Introduction

Want to get rich…slowly? If you are a day trader, stop reading. If you are interested in growing long term wealth, please read on. Start investing at a young age and invest as much as you can afford to. Invest in high quality established companies that exhibit annual dividend growth and DRIP them until the day comes that you need the income. Abstain from making knee-jerk reactions to points of high market fear or euphoria. Try to adjust your positions as infrequently as possible.

Today's investing landscape is chock-full of distractions. Investors that mean well are bombarded with marketing of every kind, promising some type of edge gained from using their service. Financial engineers work endlessly to develop new derivatives for brokerages to sell to clients to generate more commissions. Options have gained a lot of popularity in this regard and other exotic derivatives like binary options have emerged.

It's extremely easy for an investor to fall victim to the belief that they somehow have an advantage over the market. It often takes a lot of lost money and several years before realizing that the better approach would have been to keep it simple. It's not to say that options or other instruments should not be used at all. However, their use should not be the focus.

Options deserve more attention in this discussion due to the strong push of options trading strategies and education seen in recent years. Many may argue, but I have traded options for several years and have come to the conclusion that the only worthwhile trade is selling put options on stocks you want to own. Selling covered calls is a much touted strategy for increasing returns but it also probably leads to just as much lost upside gains than increased income from selling premium. Then there are a whole slew of other strategies that are mostly a waste of time. Is it any wonder Iron Condors are promoted since brokers can charge commission for a four legged option trade?

It's hard enough to beat the market; most professional fund managers fail to do so. Don't complicate investing by developing elaborate complicated trading strategies. The fact is nobody knows whether any particular stock or the market as a whole will go up or down over the next day, week, month, or year. Maybe I should not have said nobody, there is that little thing called insider trading.

Keeping It Simple

Dividend growth investing is an increasingly popular approach that many are adopting. The strategy itself is simple. Buy quality companies that have demonstrated a history of annual dividend increases. There are many other financial criteria that investors can use to screen potential stocks, but a company that has increased its dividend for the last 25 years requires substantially less scrutiny than some startup that has yet to post a profit. Building a diversified portfolio of such companies further reduces risk.

While criteria may vary, my current criteria to consider a stock for purchase include four simple questions.

  • Does the stock currently yield more than 2%?
  • Was the latest quarterly dividend increase greater than 8%?
  • Is the average of the 1, 3, 5, and 10 year dividend growth rates greater than 8%?
  • Is the consensus EPS growth over the next 5 years positive?

In addition to satisfying the above questions, I also use an RSI indicator to make sure I don't buy when the stock is considered overbought. I don't put a lot of emphasis on technical analysis, but many people do and given that fact you have to pay attention to it. It's a lot like the classic what came first; the chicken or the egg…except it's what came first, the 50 day moving average or the bounce off the 50 day moving average as a level of support?

Stocks To Get You Started

We haven't talked about any specific stocks yet, and I will delay no further. The following five stocks represent good dividend growth choices for long term investment. I own all of them except for Altria which I plan to buy on a pullback.

Altria (MO) - Smoke'em if you got'em. Altria's primary business is cigarettes, although they dabble in some other areas such as wine and real estate. There's always the regulation argument when it comes to investing in tobacco companies, but I feel that at least in the US, government makes too much tax revenue off tobacco to risk passing any substantially harmful legislation against tobacco companies.

Lockheed Martin (NYSE:LMT) - Lockheed is primarily tied to defense, meaning it supplies nations with advanced military products. Think F-22 Raptor advanced fighter jet. Nothing in the course of human history would suggest that anytime soon, at any given point in time in some part of the world, war between nations will stop. In addition, it has been evident that there are enough foreign entities that want to destroy America that its largest customer, the United States, can't afford to cut back on military spending for any significant period of time.

Coca-Cola (NYSE:KO) - This beverage maker would have been a good investment 10, 20, 30, etc. years ago and still is today. Its branding power alone marks it as one of the most recognizable companies in the world. I challenge you to find someone who has never consumed a product made by Coca-Cola, whether they knew it or not.

NextEra Energy (NYSE:NEE) - Not much to say other than this company provides electricity to customers. They provide a product that everyone in the non-third world has come to take for granted.

Exxon Mobil (NYSE:XOM) - Oil and gas producer. Whether you like it or not, the world runs on oil. There's a lot of talk about green energy and renewables in general, but oil and gas will be around for a long time. Too much depends on oil, both economically and politically, and that likely won't change anytime soon.

The following table shows the latest dividend increase as well as the 3, 5, and 10 year dividend compound annual growth rates for each of these stocks.

MO

LMT

KO

NEE

XOM

Current Yield

4.64%

3.18%

2.98%

2.98%

2.72%

3 Year Dividend CAGR

8.10%

15.65%

8.93%

9.85%

13.65%

5 Year Dividend CAGR

8.45%

21.04%

9.08%

9.65%

10.44%

10 Year Dividend CAGR

11.61%

18.47%

8.27%

8.92%

9.84%

Latest Increase

9.09%

19.71%

9.33%

8.87%

9.52%

Latest/3/5/10 Year Average

9.39%

18.39%

8.76%

9.47%

11.31%

All of these companies have positive projected earnings growth and meet all of my dividend criteria. In my next article I will attempt to outline all of my current holdings in my rollover IRA, which contains a freshly constructed dividend growth portfolio. I have chosen to DRIP all of my holdings and will hopefully demonstrate dividend growth stocks are a great investment vehicle for long term investment income by providing updates.

Source: Get Rich Slowly: 5 Stocks To Get You Started